{"id":598,"date":"2014-12-02T00:00:00","date_gmt":"2014-12-01T18:30:00","guid":{"rendered":""},"modified":"2015-12-31T16:20:41","modified_gmt":"2015-12-31T10:50:41","slug":"fifth-bi-monthly-monetary-policy-statement-2014-15-by-dr-raghuram-g-rajan-governor","status":"publish","type":"post","link":"https:\/\/taxclick.org\/type\/banking\/fifth-bi-monthly-monetary-policy-statement-2014-15-by-dr-raghuram-g-rajan-governor\/","title":{"rendered":"Fifth Bi-Monthly Monetary Policy Statement, 2014-15 By Dr. Raghuram G Rajan, Governor"},"content":{"rendered":"<p style=\"text-align:justify;background:#fffffff\"><strong>Monetary and Liquidity Measures<\/strong><\/p>\n<p style=\"text-align:justify\">On the basis of an assessment of the current and evolving<br \/>\nmacroeconomic situation, it has been decided to:<\/p>\n<ul type=\"disc\">\n<li>keep<br \/>\n     the policy repo rate under the liquidity adjustment facility (LAF)<br \/>\n     unchanged at 8.0 per cent;<\/li>\n<li>keep<br \/>\n     the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent<br \/>\n     of net demand and time liabilities (NDTL);<\/li>\n<li>continue<br \/>\n     to provide liquidity under overnight repos at 0.25 per cent of bank-wise<br \/>\n     NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos<br \/>\n     of up to 0.75 per cent of NDTL of the banking system through auctions; and<\/li>\n<li>continue<br \/>\n     with daily one-day term repos and reverse repos to smooth liquidity.<\/li>\n<\/ul>\n<p style=\"text-align:justify\">Consequently, the reverse repo rate under the LAF will remain<br \/>\nunchanged at 7.0 per cent, and the marginal standing facility (MSF) rate and<br \/>\nthe Bank Rate at 9.0 per cent.<\/p>\n<p style=\"text-align:justify\"><strong>Assessment of the Global Economy<\/strong><\/p>\n<p style=\"text-align:justify\">2. Since the fourth bi-monthly monetary policy statement of<br \/>\nSeptember 2014, the global economy has slowed, though the recent sharp fall in<br \/>\ncrude prices will have a net positive impact on global growth. The recovery in<br \/>\nthe United States is broadening on the back of stronger domestic consumption,<br \/>\nrising investment and industrial activity. In the Euro area, headwinds from<br \/>\nrecessionary forces continue to weaken industrial production and investment<br \/>\nsentiment. In Japan, growth may be picking up again on the back of stronger<br \/>\nexports, helped in part by further quantitative and qualitative easing that has<br \/>\nled to a depreciation of the yen. In China, disappointing activity and<br \/>\nstill-low inflation have prompted rate cuts by the People\u2019s Bank of China. In<br \/>\nother major emerging market economies (EMEs), downside risks to growth from<br \/>\nelevated inflation, low commodity prices, deteriorating labour market<br \/>\nconditions and stalling domestic demand have become accentuated.<\/p>\n<p style=\"text-align:justify\">3. Notwithstanding the cessation of asset purchases by the US Fed,<br \/>\nfinancial markets have remained generally buoyant on abundant liquidity<br \/>\nstemming from accommodative monetary policies in the advanced economies (AEs).<br \/>\nThe search for yield has driven global equity markets to new highs, with<br \/>\ninvestors shunning gold and commodities. Capital flows to EMEs recovered from<br \/>\nmarket turbulence in the first half of October, although some discrimination on<br \/>\nthe basis of fundamentals is becoming discernible.<\/p>\n<p style=\"text-align:justify\">&nbsp;<strong>Assessment of the Indian Economy<\/strong><\/p>\n<p style=\"text-align:justify\">4. Domestic activity weakened in Q2 of 2014-15, and activity is<br \/>\nlikely to be muted in Q3 also because of a moderate&nbsp;<em>kharif<\/em>&nbsp;harvest. The deficiency in the north-east<br \/>\nmonsoon rainfall has constrained the pace of&nbsp;<em>rabi&nbsp;<\/em>sowing, except in the southern States. Despite<br \/>\nreasonable levels of water storage in major reservoirs, the&nbsp;<em>rabi<\/em>&nbsp;crop is unlikely to compensate for the decline<br \/>\nin&nbsp;<em>kharif<\/em>&nbsp;production earlier in the year and consequently,<br \/>\nagricultural growth in 2014-15 is likely to be muted. This, along with a<br \/>\nslowdown in rural wage growth, is weighing on rural consumption demand.<\/p>\n<p style=\"text-align:justify\">5. Despite the uptick in September, the growth of industrial<br \/>\nproduction slumped to 1.1 per cent in Q2 with negative momentum in September,<br \/>\nunable to sustain the improvement recorded in the preceding quarter. The<br \/>\npersisting contraction in the production of both capital goods and consumer<br \/>\ngoods in Q2 reflected weak aggregate domestic demand. However, more recent<br \/>\nreadings of core sector activity, automobile sales and purchasing managers\u2019<br \/>\nindices suggest improvement in likely activity. Exports have buffered the<br \/>\nslowdown in industrial activity in Q2 but, going forward, require support from<br \/>\npartner country growth.<\/p>\n<p style=\"text-align:justify\">6. In the services sector, the October\u2019s purchasing managers\u2019<br \/>\nsurvey indicates deceleration in new business. In contrast, tourist arrivals<br \/>\nand domestic and international cargo movements have shown improvement. Thus,<br \/>\nvarious constituents of the services sector are emitting mixed signals.<\/p>\n<p style=\"text-align:justify\">7. A rise in investment is critical for a sustained pick-up in<br \/>\noverall economic activity. While low capacity utilisation in some sectors is a<br \/>\ndampener, the recent strong improvement in business confidence and in<br \/>\ninvestment intentions should help. In this context, the still slow pace of<br \/>\nreviving stalled projects, despite government efforts, warrants policy<br \/>\npriority, even as ongoing efforts to ease stress in the financial system unlock<br \/>\nresources for financing the envisaged investment push.<\/p>\n<p style=\"text-align:justify\">8. The fiscal outlook should brighten because of the fall in crude<br \/>\nprices, but weak tax revenue growth and the slow pace of disinvestment suggest<br \/>\nsome uncertainty about the likely achievement of fiscal targets, and the<br \/>\nquality of eventual fiscal adjustment. The government, however, appears<br \/>\ndetermined to stay on course.<\/p>\n<p style=\"text-align:justify\">9. Retail inflation, as measured by the consumer price index<br \/>\n(CPI), has decelerated sharply since the fourth bi-monthly statement of<br \/>\nSeptember. This reflects, to some extent, transitory factors such as favourable<br \/>\nbase effects and the usual softening of fruits and vegetable prices that occurs<br \/>\nat this time of the year. On the other hand, protein-rich items such as milk<br \/>\nand pulses continue to experience upside pressures, reflecting structural<br \/>\nmismatches in supply and demand. The absence of adequate administered price<br \/>\nrevisions in inputs like electricity has contributed to the easing of inflation<br \/>\nin the fuel group.<\/p>\n<p style=\"text-align:justify\">10. In the non-food non-fuel category, inflation eased broadly in<br \/>\nSeptember. Further softening of international crude prices in October eased<br \/>\nprice pressures in transport and communication. However, upside pressures<br \/>\npersist in respect of prices of clothing and bedding, housing and other<br \/>\nmiscellaneous services, resulting in non-food non-fuel inflation for October<br \/>\nremaining flat at its level in the previous month, and above headline<br \/>\ninflation. Survey-based inflationary expectations have been coming down with<br \/>\nthe fall in prices of commonly-bought items such as vegetables, but are still<br \/>\nin the low double digits. Administered price corrections, as and when they are<br \/>\neffected, weaker-than-anticipated agricultural production, and a possible rise<br \/>\nin energy prices on the back of geo-political risks could alter the currently<br \/>\nbenign inflation outlook significantly. &nbsp;<\/p>\n<p style=\"text-align:justify\">11. Liquidity conditions have eased considerably in Q3 of 2014-15<br \/>\ndue to structural and frictional factors, as well as the fine tuning of the<br \/>\nliquidity adjustment framework. With deposit mobilisation outpacing credit<br \/>\ngrowth and currency demand remaining subdued in relation to past trends, banks<br \/>\nare flush with funds, leading a number of banks to reduce deposit rates. The<br \/>\nmain frictional source of liquidity has been the large release of<br \/>\nexpenditure\/transfers by the government. In view of abundant liquidity, banks\u2019<br \/>\nrecourse to the Reserve Bank for liquidity through net fixed and variable rate<br \/>\nterm and overnight repos and MSF declined from&nbsp;`803 billion, on average, in Q1 to`706 billion in Q2 and<br \/>\nfurther to&nbsp;`476 billion in October-November. The use of export credit<br \/>\nrefinance also declined from 52.6 per cent of the limit in Q2 to 32.6 per cent<br \/>\nin October-November. The revised liquidity management framework introduced in<br \/>\nSeptember, has helped the weighted average cut-off rates in the 14-day term<br \/>\nrepo auctions as well as in the overnight variable rate repo auctions to remain<br \/>\nclose to the repo rate, and the volatility of the weighted average call rate<br \/>\nhas fallen, apart from episodes of cash build-up ahead of Diwali holidays.<\/p>\n<p style=\"text-align:justify\">12. The Reserve Bank determines the need for open market<br \/>\noperations (OMO) based on its assessment of monetary conditions rather than on<br \/>\na specific view on long term yields. On an assessment of the permanent<br \/>\nliquidity conditions, the Reserve Bank conducted OMO sales worth&nbsp;`401 billion during<br \/>\nOctober to December so far.<\/p>\n<p style=\"text-align:justify\">13. Merchandise exports declined in October, mainly reflecting<br \/>\nsluggish external demand conditions, but also the softening of international<br \/>\nprices resulting in lower realisations. For the period April-October as a<br \/>\nwhole, however, export growth remained positive although the deceleration since<br \/>\nJuly requires vigilance. With import growth remaining modest on account of the<br \/>\ndecline in POL imports due to falling crude prices, the trade deficit narrowed<br \/>\nfrom its level a year ago. Gold imports have surged since September in volume<br \/>\nterms, largely reflecting seasonal demand. Barring month-to-month variations,<br \/>\nnon-oil non-gold import growth has remained moderate, with anecdotal evidence<br \/>\nof imports substituting for shortfalls in domestic production. Even as external<br \/>\nfinancing requirements stay moderate, all categories of capital flows, except<br \/>\nnon-resident deposits, have been buoyant. The consequent accretion to reserves<br \/>\ndenominated in US dollars has been moderated by valuation effects resulting<br \/>\nfrom the strength of the US dollar.<\/p>\n<p style=\"text-align:justify\"><strong>Policy Stance and Rationale<\/strong><\/p>\n<p style=\"text-align:justify\">14. Consistent with the balance of risks set out in the fourth<br \/>\nbi-monthly monetary policy statement of September, headline inflation has been<br \/>\nreceding steadily and current readings are below the January 2015 target of 8<br \/>\nper cent as well as the January 2016 target of 6 per cent. The inflation<br \/>\nreading for November \u2013 which will become available by mid-December \u2013 is<br \/>\nexpected to show a further softening. Thereafter, however, the favourable base<br \/>\neffect that is driving down headline inflation will likely dissipate and<br \/>\ninflation for December (data release in mid-January) may well rise above<br \/>\ncurrent levels.<\/p>\n<p style=\"text-align:justify\">15. The key uncertainty is the durability of this upturn. The full<br \/>\noutcome of the north-east monsoon will determine the intensity of price<br \/>\npressures relating to cereals, oilseeds and pulses, but it is reasonable to<br \/>\nexpect some firming up of these prices in view of the monsoon\u2019s performance so<br \/>\nfar and the shortfall estimated for&nbsp;<em>kharif<\/em>production. Risks from imported inflation appear<br \/>\nto be retreating, given the softening of international commodity prices,<br \/>\nespecially crude, and reasonable stability in the foreign exchange market.<br \/>\nAccordingly, the central forecast for CPI inflation is revised down to 6 per<br \/>\ncent for March 2015 (Chart 1).<\/p>\n<p style=\"text-align:justify\"><a><\/a>&nbsp;<img decoding=\"async\" src=\"https:\/\/taxclick.org\/article_upload\/Chart1.gif\" style=\"width:575px;height:283px\"><\/p>\n<p style=\"text-align:justify\">16. Turning to the outlook for inflation in the medium-term,<br \/>\nprojections at this stage will be contingent upon expectations of a normal<br \/>\nsouth-west monsoon in 2015, international crude prices broadly around current<br \/>\nlevels and no change in administered prices in the fuel group, barring<br \/>\nelectricity. Over the next 12-month period, inflation is expected to retain<br \/>\nsome momentum and hover around 6 per cent, except for seasonal movements, as<br \/>\nthe disinflation momentum works through. Accordingly, the risks to the January<br \/>\n2016 target of 6 per cent appear evenly balanced under the current policy<br \/>\nstance.<\/p>\n<p style=\"text-align:justify\">17. Some easing of monetary conditions has already taken place.<br \/>\nThe weighted average call rates as well as long term yields for government and<br \/>\nhigh-quality corporate issuances have moderated substantially since end-August.<br \/>\nHowever, these interest rate impulses have yet to be transmitted by banks into<br \/>\nlower lending rates. Indeed, slow bank credit growth is mirrored by increasing<br \/>\nreliance of large corporations on commercial paper and domestic as well as<br \/>\nexternal public issuances.<\/p>\n<p style=\"text-align:justify\">18. Still weak demand and the rapid pace of recent disinflation<br \/>\nare factors supporting monetary accommodation. However, the weak transmission<br \/>\nby banks of the recent fall in money market rates into lending rates suggests<br \/>\nmonetary policy shifts will primarily have signaling effects for a while.<br \/>\nNevertheless, these signaling effects are likely to be large because the<br \/>\nReserve Bank has repeatedly indicated that once the monetary policy stance<br \/>\nshifts, subsequent policy actions will be consistent with the changed stance.<br \/>\nThere is still some uncertainty about the evolution of base effects in<br \/>\ninflation, the strength of the on-going disinflationary impulses, the pace of<br \/>\nchange of the public\u2019s inflationary expectations, as well as the success of the<br \/>\ngovernment\u2019s efforts to hit deficit targets. A change in the monetary policy<br \/>\nstance at the current juncture is premature. However, if the current inflation<br \/>\nmomentum and changes in inflationary expectations continue, and fiscal<br \/>\ndevelopments are encouraging, a change in the monetary policy stance is likely<br \/>\nearly next year, including outside the policy review cycle.<\/p>\n<p style=\"text-align:justify\">19. While activity appears to have lost some momentum in Q2,<br \/>\nprobably extending into Q3, conditions congenial for a turnaround \u2013 the<br \/>\nsoftening of inflation; easing of commodity prices and input costs; comfortable<br \/>\nliquidity conditions; and rising business confidence as well as purchasing<br \/>\nactivity \u2013 are gathering. These conditions could enable a pick-up in Q4 if coordinated<br \/>\npolicy efforts fructify in dispelling the drag on the economy emanating from<br \/>\nstructural constraints. A durable revival of investment demand continues to be<br \/>\nheld back by infrastructural constraints and lack of assured supply of key<br \/>\ninputs, in particular coal, power, land and minerals. The success of ongoing<br \/>\ngovernment actions in these areas will be key to reviving growth and offsetting<br \/>\ndownside risks emanating from agriculture \u2013 in view of weaker-than-expected&nbsp;<em>rabi<\/em>sowing \u2013 and exports \u2013 given the sluggishness in<br \/>\nexternal demand. Anticipating such success, the central estimate of projected<br \/>\ngrowth for 2014-15 has been retained at 5.5 per cent, with a gradual pick-up in<br \/>\nmomentum through 2015-16 on the assumption of a normal monsoon and no adverse<br \/>\nsupply\/financial shocks (Chart 2).<\/p>\n<p style=\"text-align:justify\"><a><\/a>&nbsp;<img decoding=\"async\" src=\"https:\/\/taxclick.org\/article_upload\/Chart2.gif\" style=\"width:576px;height:277px\"><\/p>\n<p style=\"text-align:justify\">20. The sixth bi-monthly monetary policy statement is scheduled on<br \/>\nTuesday, February 3, 2015.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>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 &#8230; <a title=\"Fifth Bi-Monthly Monetary Policy Statement, 2014-15 By Dr. Raghuram G Rajan, Governor\" class=\"read-more\" href=\"https:\/\/taxclick.org\/type\/banking\/fifth-bi-monthly-monetary-policy-statement-2014-15-by-dr-raghuram-g-rajan-governor\/\" aria-label=\"More on Fifth Bi-Monthly Monetary Policy Statement, 2014-15 By Dr. Raghuram G Rajan, Governor\">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],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v22.7 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Fifth Bi-Monthly Monetary Policy Statement, 2014-15 By Dr. Raghuram G Rajan, Governor - All About Finance<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/taxclick.org\/type\/banking\/fifth-bi-monthly-monetary-policy-statement-2014-15-by-dr-raghuram-g-rajan-governor\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Fifth Bi-Monthly Monetary Policy Statement, 2014-15 By Dr. Raghuram G Rajan, Governor - All About Finance\" \/>\n<meta property=\"og:description\" content=\"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 ... 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