Growth target maintained, still sees upside to medium term inflation objective
The Reserve Bank of India has realsed the Fourth Bi-Monthly Monetary Policy review on 30 September. The key highlights of the monetary policy are as follows:* Repo rate unchanged at 8.0%;
* CRR unchanged at 4.0%
* Reduced export credit refinance (ECR) facility from 32% of eligible export credit outstanding to 15% with effect from 10 October 2014;
* Liquidity under overnight repos at 0.25% maintained
* liquidity under 7-day and 14-day term repos of up to 0.75% of NDTL Maintained
Assessment
* Since the third bi-monthly monetary policy statement of August 2014, global activity has been recovering slowly from the setback in Q1 of 2014
* Domestic activity appears to have come off somewhat after the stronger-than-expected upturn in Q1 of 2014-15.
* Rainfall from the south west monsoon, now expected to be about 12% deficient, will weigh on the kharif crop, mainly due to its uneven spatial distribution.
* In the services sector, constituents are moving at varying speeds and the purchasing managers' index points to uncertainty around future prospects.
* The resumption of stalled projects should provide a boost to inventory and capex cycles, while reducing distressed bank loans and revitalising growth.
Inflation
* 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.
* 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
* Liquidity conditions have remained broadly balanced through Q2 of 2014-15, except for transient tightness in the second half of July and early August due to delayed Government expenditure.
Bank credit
* Non-food credit growth decelerated in September 2014, the lowest level since June 2001
* 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.
* Also, a few banks have sold stressed loans to asset reconstruction companies, and so these loans no longer appear as bank credit.
* Net bank credit is also lower because of repayments of loans by entities that have received payments by government departments and public enterprises, and because oil marketing companies' borrowing is lower.
* Going forward, as the investment cycle gathers momentum and overall demand picks up, banks will need to prepare to meet financing requirements as the credit cycle also turns.
Current Account
* Current account deficit, placed at 1.7% of GDP for Q1 of 2014-15 may remain contained in Q2.
Policy Stance and Rationale
* With international crude prices softening and relative stability in the foreign exchange market, some upside risks to inflation are receding.
* Yet, there are risks from food price shocks as the full effects of the monsoon's passage unfold, and from geo-political developments that could materialise rapidly.
* Turning to the medium-term objective (6% by January 2016) the balance of risks is still to the upside, though somewhat lower than in the last policy statement.
* This continues to warrant policy preparedness to contain pressures if the risks materialise.
GDP
* The momentum of activity in all sectors of the economy is yet to stabilize.
* The projection of growth for 2014-15 is retained at 5.5% within a range of 5 to 6% around this central estimate.
* The quarterly growth path may slow mildly in Q2 and Q3 before recovering in Q4.
* The fifth bi-monthly monetary policy statement is scheduled on 02 December 2014.
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