On 30 September, the Reserve
Bank of India (RBI) announced fourth Bi-Monthly Monetary Policy Statement. RBI
in its fourth bi-monthly monetary policy statement didn’t change the policy
rates and kept it at 8 %.
Monetary and Liquidity Measures
On the basis of an assessment of the current and evolving
macroeconomic situation, it has been decided to:
·
keep the policy repo rate under the liquidity adjustment facility
(LAF) unchanged at 8.0 per cent;
·
keep the cash reserve ratio (CRR) of scheduled banks unchanged at
4.0 per cent of net demand and time liabilities (NDTL);
·
reduce the liquidity provided under the export credit refinance
(ECR) facility from 32 per cent of eligible export credit outstanding to 15 per
cent with effect from October 10, 2014;
·
continue to provide liquidity under overnight repos at 0.25 per
cent of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and
14-day term repos of up to 0.75 per cent of NDTL of the banking system through
auctions; and
·
Continue with daily one-day term repos and reverse repos to smooth
liquidity.
Consequently, the reverse repo
rate under the LAF will remain unchanged at 7.0 per cent, and the marginal
standing facility (MSF) rate and the Bank Rate at 9.0 per cent.
Assessment
Since the third
bi-monthly monetary policy statement of August 2014, global activity has been
recovering slowly from the setback in Q1 of 2014, on the back of strengthening
consumer spending and gradually improving labour market conditions in advanced
economies (AEs) like the United States. However, the Euro area, where growth
has stalled in the core economies, continues to be weak. Major emerging market economies
(EMEs) continue to struggle with tepid domestic demand and headwinds from
structural impediments. With monetary policy in AEs remaining highly
accommodative, investor risk appetite has increased and spread to various asset
classes. With volatility perhaps excessively low, financial markets have risen
to new highs, driving surges of capital flows to EMEs. Apart from concerns
about a sudden correction in financial markets if investors misread the timing
of a reversal of the US monetary policy stance or if geopolitical tensions
intensify, some downside risks to growth also persist, such as a possible
further slowdown in the Euro area.
Domestic activity appears to
have come off somewhat after the stronger-than-expected upturn in Q1 of
2014-15. In Q2, the growth of industrial production slumped in July, as capital
goods production followed consumer durables into contraction. Exports cushioned
the fall in manufacturing output, with the Reserve Bank’s industrial outlook
survey indicating expansion in export orders.
Rainfall from the south west
monsoon, now expected to be about 12 per cent deficient, will weigh on the kharif crop, mainly due to its uneven spatial
distribution.
Retail inflation measured by
the consumer price index (CPI) came off the vegetable prices-driven spike in
July 2014 and eased in all major groups barring food. Large and persistent
upside pressures on food prices have resulted in their contribution rising to
almost 60 per cent of headline inflation in August.The Reserve Bank will look through base effects.
Liquidity conditions have
remained broadly balanced through Q2 of 2014-15, except for transient tightness
in the second half of July and early August due to delayed Government
expenditure. Thereafter, as these expenditures began to flow, liquidity
conditions eased. With credit growth falling well below deposit growth in
August and September, structural sources of liquidity pressures also eased. The
average recourse to liquidity from the Reserve Bank, measured by daily net
liquidity injection through LAF, term repo and MSF, decreased from `870 billion in July to `795 billion during August and further to `450 billion during September so far (up to
September 28). The Reserve Bank revised its liquidity management framework with
effect from September 5, 2014, with more frequent 14-day term repos and daily
overnight variable rate repo operations, to ensure flexibility, transparency
and predictability in liquidity management operations.
Non-food credit growth
decelerated in September 2014, the lowest level since June 2001, despite
liquidity conditions remaining comfortable and deposit growth remaining normal.
Partly, this sharp deceleration is on account of a high base – monetary
tightening to curb the exchange market pressures in July-September last year
raised interest rates on alternative sources of funds and pushed up the demand
for credit from the banking system. Adjusting for these base effects, non-food
credit growth would have been around 11 per cent in September 2014.
Incoming data suggest that the
current account deficit, placed at 1.7 per cent of GDP for Q1 of 2014-15 may
remain contained in Q2. Over April-August 2014, the trade deficit was narrower
than a year ago, notwithstanding a slowdown in export growth in July and August
and a strengthening of non-oil non-gold import growth to its highest level
since March 2013. The improvement in the trade balance has benefited from the
fall in the value of gold imports. Even as the external financing requirement
stays moderate, all categories of capital flows remain buoyant. As a result,
there has been an accretion to international reserves, even though reserves
denominated in US dollars have moderated somewhat in recent weeks, largely
because of the strength of the US dollar.
Policy
Stance and Rationale
Since June, headline inflation
has ebbed to levels which are consistent with the desired near-term glide path
of disinflation -- 8 per cent by January 2015. The most heartening feature has
been the steady decline in inflation excluding food and fuel, by a cumulative
111 basis points since January 2014, to a new low. With international crude
prices softening and relative stability in the foreign exchange market, some
upside risks to inflation are receding. Yet, there are risks from food price
shocks as the full effects of the monsoon’s passage unfold, and from
geo-political developments that could materialise rapidly.
The momentum
of activity in all sectors of the economy is yet to stabilize. Agriculture
should shed the effects of recent shocks and pick up in Q4 of 2014-15.
Industrial activity will await improvement in the business environment and the
resumption of consumption and investment demand before gaining sustained speed.
Post-monsoon revival in construction activity and the likely strengthening of
momentum in business and financial services should sustain the recent signs of
expansion in the services sector. The key to a turnaround in the growth
path of the economy in the second half of the year is a revival in investment
activity – in greenfield as well as brownfield stalled projects – supported by
fiscal consolidation, stronger export performance and sustained disinflation.
With expectations of these conditions remaining broadly unchanged, the
projection of growth for 2014-15 is retained at 5.5 per cent within a range of
5 to 6 per cent around this central estimate. The quarterly growth path may
slow mildly in Q2 and Q3 before recovering in Q4.
12. The fifth bi-monthly monetary
policy statement is scheduled on Tuesday, December 2, 2014.
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