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Indian central bank eases rules to spur lending

New Delhi, June 4, 2014

India's central bank governor Raghuram Rajan eased rules to spur bank lending and toned down his inflation rhetoric in moves set to be welcomed by a new pro-business government determined to revive economic growth.

The Reserve Bank of India (RBI), which kept interest rates on hold at eight per cent as widely expected, also hinted it would not raise rates as long as inflationary pressures continued to ease.

The loosening in credit and the central bank's surprisingly dovish remarks on inflation will put the onus on the new government to stick to conservative fiscal spending and broader reforms to get Asia's third-largest economy back on track.

The decisions from the RBI were widely seen as pragmatic moves. Rajan has placed fighting inflation at the top of his agenda, for which he will need the support of Narendra Modi, India's popular new prime minister.

In turn, investors are hopeful the new government will respond by narrowing the fiscal deficit and tackling the supply-side factors that drive up food inflation in India, thus easing the burden on the poor and restoring investors' confidence.

"If the economy stays on this course, further policy tightening will not be warranted," Rajan said in the RBI statement, referring to the moderating inflation trend.

The central bank governor added that the Modi-led victory in elections last month could help "create a conducive environment for comprehensive policy actions and a revival in aggregate demand as well as a gradual recovery of growth."

The governor's dovish tone on inflation sparked a rally in bonds and raised expectations the central bank could even ease monetary policy as early as this year.

Rajan's increased comfort on consumer price inflation - which cooled in 2014 from the near 10 per cent level in the two previous years - could allow him to take steps to improve growth after raising interest rates by a total of 75 basis points since September. Its last tightening move was in January.

Moreover, the RBI also enhanced credit available by banks.

The RBI announced a reduction in the mandatory amount of bonds lenders must park at the central bank - called the statutory liquidity ratio - by 50 basis points to 22.5 per cent of deposits, starting in mid-June.-Reuters




Tags: India | Interest rates | RBI |

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