The Reserve Bank of India on Tuesday in its sixth bi-monthly Monetary Policy review, kept key policy rates unchanged after easing monetary policy just three weeks ago, and announced a cut in Statutory liquidity Ratio (SlR) by 50 basis points.
“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 RBI to await them and maintain the current interest rate stance,” RBI Governor Raghuram Rajan said.
A cut in SlR by 50 bps from 22 percent to 21.5 per cent will bring more liquidity in the system. This is ostensibly done to create space for banks to expand credit. “Banks should use this headroom to increase their lending to productive sectors on competitive terms so as to support investment and growth,” the statement said.
As a result, policy repo rate under remains unchanged at 7.75 per cent, cash reserve ratio (CRR) at 4 per cent, reverse repo rate at 6.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 8.75 per cent.
To help exports sector, which of late has been struggling following more headwinds in the global economy, the central bank has decided to replace export credit refinance facility with the provision of system level liquidity with effect from February 7. The policy also announced replacement of the export credit refinance (ECR) facility with the provision of system level liquidity with effect from February 7, 2015.
Talking about the path of inflation in 2015-16, Rajan said, “The Reserve Bank will keenly monitor the revision in CPI, which will rebase the index to 2012 and incorporate a more representative consumption basket along with methodological improvements.” Rajan said inflation was likely to be around the target level of 6 per cent by January 2016 but flagged monsoon, oil prices and “the unlikely possibility of significant fiscal slippage” as upside risks.
Current account deficit was projected at 1.3 per cent of GDP this fiscal and even lower in the next, primarily on slumping international oil prices. Despite fiscal deficit touching 99 per cent by November, the Governor said he was confident that the government will not miss the budgeted 4.1 per cent target.
Referring to economic growth, RBI said that though revision in the base year for GDP and calculation methods will mean some revision in GDP growth numbers for 2014-15 as well as in the forecasts, growth expectations should be tempered.
“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 but 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,” RBI’s monetary policy document said. However, it noted that there is improvement in business confidence as visible from a pick-up in new investment intentions, especially in transportation, power and manufacturing.
RBI estimated the current account deficit (CAD) for 2014- 15 at 1.3 per cent of the GDP, significantly lower than the earlier projection. “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. Accordingly, there was accretion to India’s foreign exchange reserves to the tune of USD 6.8 billion in Q3,” RBI said.
Rajan said the central bank will be watching the forthcoming data on inflation and GDP. The first bi-monthly monetary policy for financial year 2015-16 is scheduled on April 7. nHe also said that the Government has the intent of producing a solid budget. Finance Minister Arun Jaitley will unveil the first full-fledged budget of the new government on February 28.
The RBI noted that the massive quantitative easing by the European Central Bank (ECB) has reinvigorated financial risk taking, boosting stock markets across the world, even though many market participants have read the softness in crude prices and the ECB’s announcement as signifying a weaker global economic outlook. It observed that bond yields in advanced economies have fallen to historic lows since there is a growing belief that the US Fed will stay on hold longer than previously thought.
Rajan warned that financial warned that financial markets are vulnerable to uncertainty surrounding monetary policy normalization in advanced economies, weaker growth in China as well as oil exporting EMEs.