New Delhi, February 3, 2015
The Reserve Bank of India on Tuesday decided to keep its key policy repo rate unchanged at 7.75 per cent, saying there had been no substantial new developments on the disinflationary process or on the fiscal outlook since January 15 when it had cut the rate by 25 basis points.
The Reserve Bank of India (RBI) today decided to keep its key policy repo rate under the liquidity adjustment facility (LAF) unchanged at 7.75 per cent, saying there had been no substantial new developments on the disinflationary process or on the fiscal outlook since January 15 when it had cut the rate by 25 basis points.
In his Sixth Bi-Monthly Monetary Policy Statement 2014-15, RBI Governor Raghuram G. Rajan also said that the cash reserve ratio of scheduled bans unchanged at 4.0 per cent of net demand and time liabilities (NDTL).
He said the statutory liquidity ratio (SLR) of commercial banks would be reduced by 50 basis points from 22.0 per cent to 21.5 per cent of their NDTL with effect from the fortnight beginning February 7.
The RBI has decided to replace the replace the export credit refinance (ECR) facility with the provision of system level liquidity with effect from February 7, 2015, he said.
It will continue to provide liquidity under overnight repos of 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.
It will also continue with daily variable rate term repo and reverse repo auctions to smooth liquidity, he said
Consequently, the reverse repo rate under the LAF will remain unchanged at 6.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 8.75 per cent, he said.
Stating that the momentum of inflation had significantly reduced, the RBI had on January 15, outside the policy review cycle, reduced the repo rate by 25 basis points from 8.0 per cent to 7.75 per cent.
"Given that there have been no substantial new developments on the disinflationary process or on the fiscal outlook since January 15, it is appropriate for the Reserve Bank to await them and maintain the current interest rate stance," Dr Rajan said today.
Dr Rajan said that, by and large, inflation dynamics had so far been consistent with the assessment of the balance of risks by the Reserve Bank’s bi-monthly monetary policy statements, although with some undershooting relative to the projected path of disinflation.
"While inflation declined faster than expected due to favourable base effects during June-November, the upturn in December turned out to be muted relative to projections. Augmenting these data with survey data on falling inflationary expectations as well as data on weak commodity prices and muted rural wage growth, the Reserve Bank projected that it would meet its objective of 6 per cent CPI inflation by January 2016. Having committed in public statements to initiate a change in the monetary policy stance as soon as incoming data permitted, the Reserve Bank cut the policy rate on January 15, 2015," he said.
He also recalled that the RBI had also indicated that "key to further easing are data that confirm continuing disinflationary pressures. Also critical would be sustained high quality fiscal consolidation…”.
The central bank said the upside risks to inflation stem from the unlikely possibility of significant fiscal slippage, uncertainty on the spatial and temporal distribution of the monsoon during 2015 as also the low probability but highly influential risks of reversal of international crude prices due to geo-political events.
"Heightened volatility in global financial markets, including through the exchange rate channel, also constitute a significant risk to the inflation assessment. Looking ahead, inflation is likely to be around the target level of 6 per cent by January 2016. As regards the path of inflation in 2015-16, the Reserve Bank will keenly monitor the revision in the CPI, which will rebase the index to 2012 and incorporate a more representative consumption basket along with methodological improvements," it said.
The RBI said the outlook for growth had improved modestly on the back of disinflation, real income gains from decline in oil prices, easier financing conditions and some progress on stalled projects.
"These conditions should augur well for a reinvigoration of private consumption demand, but the overall impact on growth could be partly offset by the weaker global growth outlook and short-run fiscal drag due to likely compression in plan expenditure in order to meet consolidation targets set for the year. Accordingly, the baseline projection for growth using the old GDP base has been retained at 5.5 per cent for 2014-15.
"For 2015-16, projections are inherently contingent upon the outlook for the south-west monsoon and the balance of risks around the global outlook. Domestically, conditions for growth are slowly improving with easing input cost pressures, supportive monetary conditions and recent measures relating to project approvals, land acquisition, mining, and infrastructure. Accordingly, the central estimate for real GDP growth in 2015-16 is expected to rise to 6.5 per cent with risks broadly balanced at this point. The revised GDP statistics (base 2011-12) released on January 30 along with advance estimates for 2014-15 expected on February 9, 2015 will need to be carefully analysed and could result in revisions to the Reserve Bank’s growth projections for 2015-16," the statement said.
Dr Rajan said that, with liquidity conditions remaining comfortable, the recourse to export credit has been low – less than 50 per cent of the limit on monthly average basis since October 2014.
In pursuance of the Dr. Urjit R. Patel Committee’s recommendation to move away from sector-specific refinance, the ECR limit has been gradually lowered since June 2014. Continuing with this rationalisation, it has been decided to merge the facility with system level liquidity provision with effect from February 7, 2015. The Reserve Bank would continue to meet system wide liquidity needs as per the revised liquidity adjustment framework announced on August 22, 2014, he said.
He said that, in order to create space for banks to expand credit, the SLR was being reduced from 22.0 per cent of NDTL to 21.5 per cent. Banks should use this headroom to increase their lending to productive sectors on competitive terms so as to support investment and growth, he said.
Dr Rajan said the revision in the base year for GDP and GDP calculation methods would mean some revision in GDP growth numbers for 2014-15 as well as in GDP forecasts.
"Domestic activity is likely to have remained subdued in Q3 of 2014-15, mainly reflecting the shortfall in the kharif harvest relative to a year ago. Agricultural growth is likely to pick up in Q4 with the late improvement in the north-east monsoon and in rabi sowing. Nevertheless, growth expectations should be tempered as lead indicators such as tractor and motorcycle sales and slowing rural wage growth all point to subdued rural demand," he said.
He said the improvement in industrial activity in November 2014 was broad-based, but continuing contraction in consumer goods production underscored the persisting weakness in consumption demand (even while raising questions about measurement of production).
Advance indicators of industrial activity - indirect tax collections; non-oil non-gold import growth; expansion in order books; and new business reported in purchasing managers surveys - pointed to a modest improvement in the months ahead, he said.
"Policy initiatives in land acquisition, as well as efforts underway to unlock mining activity and to widen the space for foreign direct investment in defence, insurance and railways, should create a more conducive setting for industrial revival. Faster clearances are also helping in resuscitating stalled projects. The improvement in business confidence is visible in a pick-up in new investment intentions, especially in transportation, power and manufacturing," he said.
The RBI said that, in the services sector, the purchasing managers’ survey indicated slower activity, especially in new orders. However, other indicators of the services sector including foreign tourist arrivals, automobile sales, cargo handled at ports, and railway freight traffic suggested improvement.
"Overall, growth prospects will be contingent upon a turnaround in investment and a durable improvement in the business climate to complement the upsurge in business optimism. The sharp reduction in oil prices as well as in inflation is likely to increase personal disposable incomes and improve domestic demand conditions in the year ahead," it said.
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