RESERVE BANK OF INDIA'S FIFTH BI-MONTHLY MONETARY POLICY REVIEW 2014-2015
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RESERVE BANK OF INDIA’S
FIFTH BI-MONTHLY MONETARY POLICY REVIEW
2014-2015CONTENTS • Key Measures • Assessment of Global Economy • Assessment of Indian Economy • Policy Stance & Rationale 23 December 2014 Private & Confidential 2
Key Measures
• The Reserve Bank of India (RBI) in its fifth bi-
monthly Monetary Policy Statement kept the repo Rate Current Previous Change
rate unchanged at 8%. (%) (%) (%)
• Consequently, the reverse repo rate remains Cash Reserve Ratio 4.00 4.00 —
unchanged at 7% and the Marginal Standing Facility
(MSF) is at 9%.
Statutory Liquidity 22.00 22.00 —
• The Cash Reserve Ratio (CRR) too has remained Ratio
unchanged at 4% of bank's net demand and time
liability (NDTL). Repo Rate 8.00 8.00 —
• The RBI continues to provide liquidity under
Reverse Repo Rate 7.00 7.00 —
overnight repos at 0.25% of bank wise NDTL at LAF
repo rate and liquidity under 7-day and 14-day term
repos of up to 0.75% of NDTL of banking system Marginal Standing 9.00 9.00 —
through auctions. Facility
Bank Rate 9.00 9.00 —
23 December 2014 Private & Confidential 3Assessment of Global Economy • Global economy has slowed though recent sharp fall in crude oil prices will have a net positive impact on global growth. • Recovery in United States is broadening on the back of stronger domestic consumption, rising investment and industrial activity. • In Euro area, headwinds from recessionary forces continue to weaken industrial production and investment sentiment. • In Japan, growth may be picking up again on the back of stronger exports, helped in part by further quantitative and qualitative easing that has led to depreciation of yen. • In China, disappointing activity and still low inflation have prompted rate cuts by the People's Bank of China. • Downside risks to growth from elevated inflation, low commodity prices, deteriorating labour market conditions and stalling domestic demand have become accentuated in major emerging market economies (EMEs). 23 December 2014 Private & Confidential 4
Assessment of Indian Economy • In Q2 of 2014-15, domestic activity weakened and activity is likely to be muted in Q3 also because of a moderate kharif harvest. Agricultural growth in 2014-15 is likely to be muted as the rabi crop is unlikely to compensate for the decline in kharif production in the year despite reasonable levels of water storage in major reservoirs. • Despite the uptick in September, the growth of industrial production slumped to 1.1% in Q2 with negative momentum in September, unable to sustain the improvement recorded in preceding quarter. The persisting contraction in the production of both capital goods and consumer goods in Q2 reflected weak aggregate domestic demand. • October's purchasing managers' in services sector indicates deceleration in new business. On the contrary, tourist arrivals and domestic and international cargo movements have shown improvement. Hence, there are mixed signals emanating out of services sector. • Fiscal outlook should brighten because of fall in crude prices but weak tax revenue growth and slow pace of disinvestment suggest some uncertainty about the likely achievement of fiscal targets and quality of eventual fiscal adjustment. Also, inflation is on a downward trend. 23 December 2014 Private & Confidential 5
Policy Stance & Rationale • Headline inflation has been receding steadily and current readings are below January 2015 target of 8% as well as the January 2016 target of 6%. The inflation reading for November is expected to show a further softening. • Full outcome of the North-East monsoon will determine the intensity of price pressures relating to cereals, oilseeds and pulses but it is reasonable to expect some firming up of these prices in view of monsoon's performance so far and shortfall estimated for kharif production. Risks from imported inflation appear to be retreating, especially crude price fall. Accordingly, Central forecast for CPI inflation is revised down to 6% for March 2015. • There is still some uncertainty about the evolution of base effects in inflation, the strength of the on-going disinflationary impulses, the pace of change of the public's inflationary expectations as well as the success of the government's efforts to hit deficit targets. A change in the monetary policy stance at the current juncture is premature. However, if the current inflation momentum and changes in monetary policy stance is likely early next year, including outside the policy review cycle. 23 December 2014 Private & Confidential 6
References • Fifth Bi-Monthly Monetary Policy Statement, Reserve Bank of India; December 2, 2014 23 December 2014 Private & Confidential 7
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