Disappointing markets and the industry, RBI Governor Raghuram Rajan on Tuesday left interest rate unchanged, saying there are no developments to warrant further easing since the unscheduled rate cut about a fortnight ago.
He hoped banks will pass on the benefit to consumers from the last rate cut.
The Reserve Bank maintained the benchmark repurchase rate at 7.75 per cent, while leaving broad hints that future cuts will depend on the fiscal consolidation path provided by Finance Minister Arun Jaitley in his first full budget later this month, as also on inflation and other macroeconomic data.
RBI, which announced a surprise interest rate reduction of 0.25 per cent on January 15, said there has been no significant development since then to warrant any further easing of monetary stance.
While stock markets fell sharply following RBI's decision, bankers and economists expressed hope that a fresh round of rate reductions would begin after budget for up to one per cent cuts over the remaining months of 2015.
It, however, cut the statutory liquidity ratio (SLR) – or the amount of funds that lenders must set aside - by 50 basis points to 21.5 per cent of deposits from February 7, as it looked to prod banks to lend more and lower lending rates. The move may infuse Rs 45,000 crore liquidity into the system.
Rajan, who had his birthday today, expressed unhappiness over most of the 45 commercial banks not cutting base lending rates since the 0.25 per cent rate cut about a fortnight ago.
Despite a generalised fall in cost of funds, banks are yet to pass the benefits to consumers, he said. "Many have been relatively quick to cut the deposit rates but not so quick to cut the lending rates ... I think it is the pressure of the competition which will eventually force them to pass through these cuts. So let us wait and see. It is not regulatory intervention... it is competition," he said.
The central bank reiterated that it wanted more comfort on inflation front and "high-quality fiscal consolidation", saying the prospect of more rate cuts would depend on government efforts to reduce fiscal deficit and fix inflationary pressures.
"Further action... will depend on developments in particular on developments on fiscal front as well as a continuation of the disinflationary process. Our further actions will be driven by data," he said.
While the next review will be on April 7, the Governor, however, said a rate action can happen outside the scheduled monetary policy review.
Stating that Finance Minister Arun Jaitley has reiterated the government's desire to stick to the budgetary target for this year, Rajan said the RBI will be looking at the fiscal consolidation path provided in the Budget. "I think the government has the intent of producing a solid budget".
Presenting sixth bi-monetary policy review, Rajan said there have been "no substantial new developments on the disinflationary process or on the fiscal outlook since January 15, it is appropriate for the RBI to await them and maintain the current interest rate stance".
On the SLR cut, Rajan said, "Banks should use this headroom to increase their lending to productive sectors on competitive terms so as to support investment and growth." Commenting on the policy, bankers said the RBI policy was in line with market expectations of a status-quo.
"The SLR cut is expected to provide growth supportive liquidity of about Rs 45,000 crore. With inflationary expectations at a 21-quarter low and coupled with a benign global environment, we are in the early phases of a prolonged rate easing cycle," SBI Chairperson Arundhati Bhattacharya said.
Stock markets, however, fell sharply soon after the policy was announced, with BSE Sensex slipping over 122 points to end at nearly two-week low of 29,000.14 points weighed down by rate-sensitive banking and realty shares.
ICICI Bank MD & CEO Chanda Kochhar said: "The decision to hold policy rates was expected given the rate cut just a few weeks ago and in line with the central bank's approach of observing the inflation trends over a period of time before taking policy action".
Industry chambers said a rate cut would have propped up the sentiments, but expressed hope that RBI would resume "rate cut cycle" post budget. "We see the need for a cut of at least another 0.75 per cent during 2015 and its effective transmission by the banks to industry in the form of lower lending rates to boost growth on a sustainable basis," Ficci said.
In the policy review, the RBI announced a slew of initiatives to develop markets, including allowing foreign institutional investors to re-invest government bond coupons even when their investment limits are exhausted.
To help exports sector, which of late has been struggling following more headwinds in the global economy, it decided to replace export credit refinance facility with the provision of system level liquidity with effect from February 7.
Rajan said inflation was likely to be around the target level of 6 per cent by January 2016 but flagged monsoon, oil prices and "the unlikely possibility of significant fiscal slippage" as upside risks.
The RBI estimates a Current Account Deficit of 1.3 per cent of GDP this fiscal, primarily on slumping international oil prices.
Referring to economic growth, RBI said that though revision in the base year for GDP and calculation methods will mean some revision in GDP growth numbers for 2014-15 as well as in the forecasts, growth expectations should be tempered.
RBI estimates the GDP (under old base year) for current fiscal at 5.5 per cent and 6.5 per cent in 2015-16.
On payments banks and small finance banks as differentiated banks, RBI said it has received 72 applications for small finance banks and 41 applications for payments banks up to the deadline for submission on Monday.
The central bank also doubled the eligibility limit for foreign exchange remittances under the Liberalised Remittance Scheme (LRS) to $ 250,000 per person per year.
