Minutes of the Monetary Policy Committee Meeting October , , was held on October 3 and 4, at the Reserve Bank of India. keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at Since the fifth bi-monthly statement of December , global growth . and crude oil, the January target of 6 per cent should be met. Minutes of the Monetary Policy Committee Meeting December , .. cut in the policy rate between January and November
Monetary Policy Monetary and Liquidity Measures On the basis of an assessment of the current and evolving macroeconomic situation, it has been decided to: Consequently, the reverse repo rate under the LAF will remain unchanged at 7.
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 In Q2, the growth of industrial production slumped in July, as capital goods production followed consumer durables into contraction.
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. This has resulted in drought-like conditions in some major production zones in the north-west region but also floods in the northern and eastern regions. The recent cautious optimism that is building in the economy on the back of improved business sentiment needs to be placed on solid foundations through a step-up in investment.
In this context, the resumption of stalled projects should provide a boost to inventory and capex cycles, while reducing distressed bank loans and revitalising growth.
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Retail inflation measured by the consumer price index CPI came off the vegetable prices-driven spike in July 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 full impact of the skewed rainfall distribution carries risks to the future path of food inflation, though vegetable prices have fallen recently after the recent spike.
CPI inflation excluding food and fuel decelerated to its lowest level in the new series, mainly on account of sharp disinflation in transport and communication and household requisites. Future food prices and the timing and magnitude of held back administered price revisions impart some uncertainty to an otherwise improving inflation outlook, where lower oil prices, a relatively stable currency, and a negative output gap continue to put downward pressure.RBI December 14th Meet: Expectations
Base effects will also temper inflation in the next few months only to reverse towards the end of the year. The Reserve Bank will look through base effects. Liquidity conditions have remained broadly balanced through Q2 ofexcept 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 Reserve Bank revised its liquidity management framework with effect from September 5,with more frequent 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 Septemberthe lowest level since Junedespite 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 Corporates have also opted to raise financing through alternative sources such as commercial paper, which are significantly larger than a year ago. Finance from other non-bank sources such as foreign direct investment and external commercial borrowing has also increased. Although core inflation and wage growth are subdued, deflation risks appear to be receding.
In Japan, the combination of exceptional monetary accommodation and fiscal stimulus has failed to spur sustainable domestic demand so far. In China, growth in Q4 of was the slowest sincepulled down by manufacturing, residential investment and exports.
EME commodity exporters confront recessionary conditions, falling currencies, sluggish exports and still high inflation relative to their recent histories. The December calm in global financial markets — suggesting that the normalisation of US monetary policy was fully anticipated — was dispelled in January by fears of further weakening of the Chinese economy and the depreciation of the Renminbi.
Capital outflows from China triggered sell-offs across AEs and EMEs, exacerbating currency declines and heightening volatility. Prices of gold prices and US Treasuries hardened on safe haven demand. Financial markets remain vulnerable to bouts of volatility and capital outflows from EMEs as an asset class. Bearish commodity price dynamics are also likely to impact investor sentiment.
On the domestic front, economic activity lost momentum in Q3 ofpulled down by slackening agricultural and industrial growth. The north-east monsoon season ended in December with a deficiency of 23 per cent relative to the long period average LPA. By end-January, rabi sowing was mildly deficient relative to a year ago, as well as to the quinquennial average in respect of all crops, except coarse cereals. Rural incomes will continue to be supported by allied activities such as dairy and horticulture, which now contribute as much to GDP as food grains.
In the first two months of Q3 ofindustrial activity slowed in relation to the preceding quarter. This mainly reflects weak investment demand with some deceleration of capital goods production. Stalled projects continue to remain high, and there is a decline in new investment intentions, perhaps on the back of low capacity utilization. While revenue growth in manufacturing has been modest, the fall in costs, partly because of a decline in commodity prices, and partly because of improvements in manufacturing efficiency, have resulted in relatively stronger profitability.
Lead indicators of the services sector are mixed. Construction activity is still tepid, as evidenced by weak growth in cement production, though the pick-up in road construction bodes well for future activity, especially if supported by construction in the major proposed industrial corridors. Railway freight growth is still weak, though it may reflect lower transport needs for inputs like coal, and competition from roadways. However, the services PMI rose to a ten-month high in December on improvement in new business orders and upbeat expectations.
Retail inflation measured by the consumer price index CPI rose for the fifth month in December across all constituent categories.
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While the upturn in December essentially reflected unfavourable base effects, the ongoing seasonal decline in prices of fruits and vegetables could temper headline inflation in the near-term.
Prices of cereals recorded modest increases despite the adverse monsoon, indicative of effective supply management. The real appreciation of the rupee may also have had some effect. The fall in international crude prices translated into a sizable saving on account of POL imports, despite a pick-up in import volumes in Q3.
Gold imports also moderated, coming off the seasonal cum pent-up demand spurt in September-November. On the other hand, non-oil non-gold import growth remained firm and in positive territory, extending a run that began in May. Although overall imports declined in December, they recorded an expansion for Q3 as a whole on the back of the earlier rise in gold and non-oil non-gold items. As a consequence, the trade deficit widened in Q3 relative to the preceding quarter.
The estimate of the current account deficit CAD for is currently placed at 1. The CAD has been comfortably financed by net capital inflows, mainly in the form of buoyant portfolio flows but also supported by foreign direct investment inflows and external commercial borrowings.
Policy Stance and Rationale 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 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, 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.
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 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 Chart 1.
As regards the path of inflation inthe Reserve Bank will keenly monitor the revision in the CPI, which will rebase the index to and incorporate a more representative consumption basket along with methodological improvements. The outlook for growth has 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. Forprojections 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 is expected to rise to 6. 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 In pursuance of the Dr.
Continuing with this rationalisation, it has been decided to merge the facility with system level liquidity provision with effect from February 7, The Reserve Bank would continue to meet system wide liquidity needs as per the revised liquidity adjustment framework announced on August 22, In order to create space for banks to expand credit, the SLR is being reduced from Banks should use this headroom to increase their lending to productive sectors on competitive terms so as to support investment and growth.
Developmental and Regulatory Measures Developmental and regulatory measures are put in place by the Reserve Bank periodically within the organising framework of the five-pillar approach announced in October in the Second Quarter Review of Monetary Policy for The measures set out in this part of the statement emphasise broadening and deepening financial markets; fortifying banking structure; and dealing with stress in banking assets by putting projects back on track.
With stability in the foreign exchange market, this limit was enhanced to USDin June without end-use restrictions, except for prohibited foreign exchange transactions such as margin trading, lotteries and the like.
On a review of the external sector outlook and as a further exercise in macro prudential management, it has been decided to enhance the limit under the LRS to USDper person per year. Guidelines in this regard will be issued separately. The limit on investment in Government securities is now fully utilised.
As a measure to incentivise long term investors, it has been decided in consultation with Government to enable reinvestment of coupons in Government securities even when the existing limits are fully utilised.
FPIs are currently permitted to invest in Government securities with a minimum residual maturity of three years.