No rate cut by RBI in monetary policy review; Read Guv Raghuram Rajan’s full statement
RBI Monetary Policy Review: Governor Raghuram Rajan kept policy rate on hold at 6.75 percent on Tuesday, as widely expected, opting to wait until after the government’s annual budget statement at the end February to decide on whether to cut interest rates further. The central bank cut the repo rate by 125 basis points in 2015, including by a bigger-than-expected 50 bps in September. It held rates at its last meeting in December. Read here the RBI Governor Raghuram Rajan statement:
Sixth Bi-monthly Monetary Policy Statement, 2015-16
Monetary and Liquidity Measures
On the basis of an assessment of the current and evolving macroeconomic situation, it has been decided to:
* keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.75 per cent;
* keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liability (NDTL);
* continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 14-day term repos as well as longer term repos of up to 0.75 per cent of NDTL of the banking system through auctions; and
* continue with daily variable rate repos and reverse repos to smooth liquidity.
Consequently, the reverse repo rate under the LAF will remain unchanged at 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 7.75 per cent.
Assessment
2. Since the fifth bi-monthly statement of December 2015, global growth has slowed, with the ongoing weakening of activity in major emerging market economies (EMEs) outweighing the recovery in some advanced economies (AEs). World trade has remained subdued, held down by anaemic demand, new lows in commodity prices and currency realignments. In the United States, an improving labour market continues to support a consumption-led recovery. Manufacturing activity is sluggish, however, reflecting retrenchment in oil and gas drilling activity and declining exports. In the Euro area, improving labour market and financing conditions are supporting consumer spending and business investment. 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 2015 was the slowest since 2009, pulled 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.
3. The December calm in global financial markets – suggesting that the normalisation of US monetary policy was fully anticipated – was dispelled in January 2016 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. Crude oil prices fell below US $ 30 per barrel – a 12-year low –on expectations of Iran adding to the supply glut. 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.
4. On the domestic front, economic activity lost momentum in Q3 of 2015-16, pulled 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.
5. In the first two months of Q3 of 2015-16, industrial 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. The Reserve Bank’s industrial outlook survey suggests a modest expansion of activity likely in Q4. In January 2016, the manufacturing purchasing managers’ index (PMI) expanded to a four-month high on, inter alia, resumption of output by firms affected by the December floods as well as on new domestic and export orders.
6. 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.
7. Retail inflation measured by the consumer price index (CPI) rose for the fifth month in December across all constituent categories. 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. On the other hand, pulses inflation continued to remain elevated, reflecting structural mismatches.
8. CPI inflation excluding food and fuel rose for the fourth successive month. Excluding petrol and diesel from this category, inflation remained flat. A breakdown into goods and services categories shows that while goods inflation declined, services inflation has been sticky since September 2015 across housing, transport and communication, medical and other services. Household inflation expectations remain elevated and the rate of increase in corporate staff costs picked up. On the other hand, rural wage growth has been muted.
9. Liquidity conditions tightened in the second half of December with advance tax outflows. Tightness spilled over into January 2016 on the back of a seasonal pick-up in demand for currency, restrained spending by the government and a pick-up in bank credit growth, in relation to deposit mobilisation. In order to mitigate these conditions, the Reserve Bank injected liquidity through variable rate term repos of varying tenors ranging from overnight to 56 days, besides provision through the regular liquidity windows. The average daily liquidity injection (including variable rate overnight and term repos) increased from 1,200 billion in December to about 1,345 billion in January. In addition, the Reserve Bank also injected 200 billion through open market purchase operations on December 7 and January 20. In response, money market rates remained close to the policy rate with a marginal downside bias. Bank credit in the form of personal loans and non-bank flows from both domestic and foreign sources grew strongly.
10. India’s exports remained in contraction mode for the thirteenth successive month in December, although there are indications of a sequential bottoming out. In volume terms too, the rate of decline appears to be moderating. While softer petroleum, oil and lubricants (POL) and commodity prices helped to contain the trade deficit, these benign effects were offset by a spike in the quantum of gold and POL imports. As a consequence, the trade deficit widened during December in relation to preceding months, though the overall current account deficit is likely to remain well contained and easily financed. Net foreign direct investment (FDI) and non-resident deposits have remained robust in relation to last year. The persisting decline in oil prices may, however, impact the flow of remittances from the Gulf region where fiscal positions are deteriorating rapidly. Portfolio investment also recorded some outflows since November. Nevertheless, as on January 22, 2016, foreign exchange reserves stood at US$ 347.6 billion – an accretion of US$ 5.9 billion during the current financial year so far.
Read full article: The Financial Express