Monetary and Liquidity Measures<\/strong><\/p>\n

On the basis of an assessment of the current and evolving
\nmacroeconomic situation, it has been decided to:<\/p>\n

\n
• keep
  \n the policy repo rate under the liquidity adjustment facility (LAF)
  \n unchanged at 8.0 per cent;<\/li>\n
• keep
  \n the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent
  \n of net demand and time liabilities (NDTL);<\/li>\n
• continue
  \n to provide liquidity under overnight repos at 0.25 per cent of bank-wise
  \n NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos
  \n of up to 0.75 per cent of NDTL of the banking system through auctions; and<\/li>\n
• continue
  \n with daily one-day term repos and reverse repos to smooth liquidity.<\/li>\n<\/ul>\n

  Consequently, the reverse repo rate under the LAF will remain
  \nunchanged at 7.0 per cent, and the marginal standing facility (MSF) rate and
  \nthe Bank Rate at 9.0 per cent.<\/p>\n

  Assessment of the Global Economy<\/strong><\/p>\n

  2. Since the fourth bi-monthly monetary policy statement of
  \nSeptember 2014, the global economy has slowed, though the recent sharp fall in
  \ncrude prices will have a net positive impact on global growth. The recovery in
  \nthe United States is broadening on the back of stronger domestic consumption,
  \nrising investment and industrial activity. In the Euro area, headwinds from
  \nrecessionary forces continue to weaken industrial production and investment
  \nsentiment. In Japan, growth may be picking up again on the back of stronger
  \nexports, helped in part by further quantitative and qualitative easing that has
  \nled to a depreciation of the yen. In China, disappointing activity and
  \nstill-low inflation have prompted rate cuts by the People\u2019s Bank of China. In
  \nother major emerging market economies (EMEs), downside risks to growth from
  \nelevated inflation, low commodity prices, deteriorating labour market
  \nconditions and stalling domestic demand have become accentuated.<\/p>\n

  3. Notwithstanding the cessation of asset purchases by the US Fed,
  \nfinancial markets have remained generally buoyant on abundant liquidity
  \nstemming from accommodative monetary policies in the advanced economies (AEs).
  \nThe search for yield has driven global equity markets to new highs, with
  \ninvestors shunning gold and commodities. Capital flows to EMEs recovered from
  \nmarket turbulence in the first half of October, although some discrimination on
  \nthe basis of fundamentals is becoming discernible.<\/p>\n

   Assessment of the Indian Economy<\/strong><\/p>\n

  4. Domestic activity weakened in Q2 of 2014-15, and activity is
  \nlikely to be muted in Q3 also because of a moderate kharif<\/em> harvest. The deficiency in the north-east
  \nmonsoon rainfall has constrained the pace of rabi <\/em>sowing, except in the southern States. Despite
  \nreasonable levels of water storage in major reservoirs, the rabi<\/em> crop is unlikely to compensate for the decline
  \nin kharif<\/em> production earlier in the year and consequently,
  \nagricultural growth in 2014-15 is likely to be muted. This, along with a
  \nslowdown in rural wage growth, is weighing on rural consumption demand.<\/p>\n

  5. Despite the uptick in September, the growth of industrial
  \nproduction slumped to 1.1 per cent in Q2 with negative momentum in September,
  \nunable to sustain the improvement recorded in the preceding quarter. The
  \npersisting contraction in the production of both capital goods and consumer
  \ngoods in Q2 reflected weak aggregate domestic demand. However, more recent
  \nreadings of core sector activity, automobile sales and purchasing managers\u2019
  \nindices suggest improvement in likely activity. Exports have buffered the
  \nslowdown in industrial activity in Q2 but, going forward, require support from
  \npartner country growth.<\/p>\n

  6. In the services sector, the October\u2019s purchasing managers\u2019
  \nsurvey indicates deceleration in new business. In contrast, tourist arrivals
  \nand domestic and international cargo movements have shown improvement. Thus,
  \nvarious constituents of the services sector are emitting mixed signals.<\/p>\n

  7. A rise in investment is critical for a sustained pick-up in
  \noverall economic activity. While low capacity utilisation in some sectors is a
  \ndampener, the recent strong improvement in business confidence and in
  \ninvestment intentions should help. In this context, the still slow pace of
  \nreviving stalled projects, despite government efforts, warrants policy
  \npriority, even as ongoing efforts to ease stress in the financial system unlock
  \nresources for financing the envisaged investment push.<\/p>\n

  8. The fiscal outlook should brighten because of the fall in crude
  \nprices, but weak tax revenue growth and the slow pace of disinvestment suggest
  \nsome uncertainty about the likely achievement of fiscal targets, and the
  \nquality of eventual fiscal adjustment. The government, however, appears
  \ndetermined to stay on course.<\/p>\n

  9. Retail inflation, as measured by the consumer price index
  \n(CPI), has decelerated sharply since the fourth bi-monthly statement of
  \nSeptember. This reflects, to some extent, transitory factors such as favourable
  \nbase effects and the usual softening of fruits and vegetable prices that occurs
  \nat this time of the year. On the other hand, protein-rich items such as milk
  \nand pulses continue to experience upside pressures, reflecting structural
  \nmismatches in supply and demand. The absence of adequate administered price
  \nrevisions in inputs like electricity has contributed to the easing of inflation
  \nin the fuel group.<\/p>\n

  10. In the non-food non-fuel category, inflation eased broadly in
  \nSeptember. Further softening of international crude prices in October eased
  \nprice pressures in transport and communication. However, upside pressures
  \npersist in respect of prices of clothing and bedding, housing and other
  \nmiscellaneous services, resulting in non-food non-fuel inflation for October
  \nremaining flat at its level in the previous month, and above headline
  \ninflation. Survey-based inflationary expectations have been coming down with
  \nthe fall in prices of commonly-bought items such as vegetables, but are still
  \nin the low double digits. Administered price corrections, as and when they are
  \neffected, weaker-than-anticipated agricultural production, and a possible rise
  \nin energy prices on the back of geo-political risks could alter the currently
  \nbenign inflation outlook significantly.  <\/p>\n

  11. Liquidity conditions have eased considerably in Q3 of 2014-15
  \ndue to structural and frictional factors, as well as the fine tuning of the
  \nliquidity adjustment framework. With deposit mobilisation outpacing credit
  \ngrowth and currency demand remaining subdued in relation to past trends, banks
  \nare flush with funds, leading a number of banks to reduce deposit rates. The
  \nmain frictional source of liquidity has been the large release of
  \nexpenditure\/transfers by the government. In view of abundant liquidity, banks\u2019
  \nrecourse to the Reserve Bank for liquidity through net fixed and variable rate
  \nterm and overnight repos and MSF declined from `803 billion, on average, in Q1 to`706 billion in Q2 and
  \nfurther to `476 billion in October-November. The use of export credit
  \nrefinance also declined from 52.6 per cent of the limit in Q2 to 32.6 per cent
  \nin October-November. The revised liquidity management framework introduced in
  \nSeptember, has helped the weighted average cut-off rates in the 14-day term
  \nrepo auctions as well as in the overnight variable rate repo auctions to remain
  \nclose to the repo rate, and the volatility of the weighted average call rate
  \nhas fallen, apart from episodes of cash build-up ahead of Diwali holidays.<\/p>\n

  12. The Reserve Bank determines the need for open market
  \noperations (OMO) based on its assessment of monetary conditions rather than on
  \na specific view on long term yields. On an assessment of the permanent
  \nliquidity conditions, the Reserve Bank conducted OMO sales worth `401 billion during
  \nOctober to December so far.<\/p>\n

  13. Merchandise exports declined in October, mainly reflecting
  \nsluggish external demand conditions, but also the softening of international
  \nprices resulting in lower realisations. For the period April-October as a
  \nwhole, however, export growth remained positive although the deceleration since
  \nJuly requires vigilance. With import growth remaining modest on account of the
  \ndecline in POL imports due to falling crude prices, the trade deficit narrowed
  \nfrom its level a year ago. Gold imports have surged since September in volume
  \nterms, largely reflecting seasonal demand. Barring month-to-month variations,
  \nnon-oil non-gold import growth has remained moderate, with anecdotal evidence
  \nof imports substituting for shortfalls in domestic production. Even as external
  \nfinancing requirements stay moderate, all categories of capital flows, except
  \nnon-resident deposits, have been buoyant. The consequent accretion to reserves
  \ndenominated in US dollars has been moderated by valuation effects resulting
  \nfrom the strength of the US dollar.<\/p>\n

  Policy Stance and Rationale<\/strong><\/p>\n

  14. Consistent with the balance of risks set out in the fourth
  \nbi-monthly monetary policy statement of September, headline inflation has been
  \nreceding steadily and current readings are below the January 2015 target of 8
  \nper cent as well as the January 2016 target of 6 per cent. The inflation
  \nreading for November \u2013 which will become available by mid-December \u2013 is
  \nexpected to show a further softening. Thereafter, however, the favourable base
  \neffect that is driving down headline inflation will likely dissipate and
  \ninflation for December (data release in mid-January) may well rise above
  \ncurrent levels.<\/p>\n

  15. The key uncertainty is the durability of this upturn. The full
  \noutcome of the north-east monsoon will determine the intensity of price
  \npressures relating to cereals, oilseeds and pulses, but it is reasonable to
  \nexpect some firming up of these prices in view of the monsoon\u2019s performance so
  \nfar and the shortfall estimated for kharif<\/em>production. Risks from imported inflation appear
  \nto be retreating, given the softening of international commodity prices,
  \nespecially crude, and reasonable stability in the foreign exchange market.
  \nAccordingly, the central forecast for CPI inflation is revised down to 6 per
  \ncent for March 2015 (Chart 1).<\/p>\n

  <\/a> <\/p>\n

  16. Turning to the outlook for inflation in the medium-term,
  \nprojections at this stage will be contingent upon expectations of a normal
  \nsouth-west monsoon in 2015, international crude prices broadly around current
  \nlevels and no change in administered prices in the fuel group, barring
  \nelectricity. Over the next 12-month period, inflation is expected to retain
  \nsome momentum and hover around 6 per cent, except for seasonal movements, as
  \nthe disinflation momentum works through. Accordingly, the risks to the January
  \n2016 target of 6 per cent appear evenly balanced under the current policy
  \nstance.<\/p>\n

  17. Some easing of monetary conditions has already taken place.
  \nThe weighted average call rates as well as long term yields for government and
  \nhigh-quality corporate issuances have moderated substantially since end-August.
  \nHowever, these interest rate impulses have yet to be transmitted by banks into
  \nlower lending rates. Indeed, slow bank credit growth is mirrored by increasing
  \nreliance of large corporations on commercial paper and domestic as well as
  \nexternal public issuances.<\/p>\n

  18. Still weak demand and the rapid pace of recent disinflation
  \nare factors supporting monetary accommodation. However, the weak transmission
  \nby banks of the recent fall in money market rates into lending rates suggests
  \nmonetary policy shifts will primarily have signaling effects for a while.
  \nNevertheless, these signaling effects are likely to be large because the
  \nReserve Bank has repeatedly indicated that once the monetary policy stance
  \nshifts, subsequent policy actions will be consistent with the changed stance.
  \nThere is still some uncertainty about the evolution of base effects in
  \ninflation, the strength of the on-going disinflationary impulses, the pace of
  \nchange of the public\u2019s inflationary expectations, as well as the success of the
  \ngovernment\u2019s efforts to hit deficit targets. A change in the monetary policy
  \nstance at the current juncture is premature. However, if the current inflation
  \nmomentum and changes in inflationary expectations continue, and fiscal
  \ndevelopments are encouraging, a change in the monetary policy stance is likely
  \nearly next year, including outside the policy review cycle.<\/p>\n

  19. While activity appears to have lost some momentum in Q2,
  \nprobably extending into Q3, conditions congenial for a turnaround \u2013 the
  \nsoftening of inflation; easing of commodity prices and input costs; comfortable
  \nliquidity conditions; and rising business confidence as well as purchasing
  \nactivity \u2013 are gathering. These conditions could enable a pick-up in Q4 if coordinated
  \npolicy efforts fructify in dispelling the drag on the economy emanating from
  \nstructural constraints. A durable revival of investment demand continues to be
  \nheld back by infrastructural constraints and lack of assured supply of key
  \ninputs, in particular coal, power, land and minerals. The success of ongoing
  \ngovernment actions in these areas will be key to reviving growth and offsetting
  \ndownside risks emanating from agriculture \u2013 in view of weaker-than-expected rabi<\/em>sowing \u2013 and exports \u2013 given the sluggishness in
  \nexternal demand. Anticipating such success, the central estimate of projected
  \ngrowth for 2014-15 has been retained at 5.5 per cent, with a gradual pick-up in
  \nmomentum through 2015-16 on the assumption of a normal monsoon and no adverse
  \nsupply\/financial shocks (Chart 2).<\/p>\n

  <\/a> <\/p>\n

  20. The sixth bi-monthly monetary policy statement is scheduled on
  \nTuesday, February 3, 2015.<\/p>\n","protected":false},"excerpt":{"rendered":"

  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 … Read more<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_uag_custom_page_level_css":"","_mi_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[10],"tags":[175,230],"class_list":["post-598","post","type-post","status-publish","format-standard","hentry","category-banking","tag-bank","tag-policy"],"yoast_head":"\n