Raghuram Rajan
Raghuram Rajan

The Reserve Bank of India has kept major policy rates unchanged in its first ‘Bimonthly’ Monetary Policy Statement 2015-16 announced on April 7. Thus, overnight policy rate (repo rate) under the liquidity adjustment facility remains at 7.5 per cent (after two 25 bps reductions each in January and March). There is also no change in other rates: Reverse Repo rate continues to be 6.5 per cent, Marginal Standing Facility rate and the Bank Rate 8.5 per cent, CRR 4.0 per cent and SLR 21.5 per cent. RBI would continue to provide liquidity to banks under short-term LAF up to 0.25 per cent of bank’s NDTL and that under 7-day and 14-day repos at 0.75 per cent bank’s of NDTL.

Even as the apex bank moved to ensure comfortable liquidity through pro-active liquidity management in tune with the change in monetary policy to accommodative stance, past two rate cuts have not led to easing of lending rates by banks, despite poor credit offtake. In fact, a lacking transmission and the possibility that there could be upside tilt in balance of risks in inflation, have influenced RBI’s decision to maintain status quo in policy rates. By the way, taking a hint, major banks like SBI, ICICI Bank and HDFC Bank have come out with some cuts in their lending rates after the policy announcement.

Assessment
Global growth is likely to firm up through 2015 and 2016, supported by stronger recovery in the advanced economies and soft energy prices. Downside risks mainly emanate from the slowdown in China, geopolitical risks surrounding oil prices and the uneven effects of currency and commodity price movements.

Domestically, the industrial sector, and in particular, manufacturing appears to be regaining momentum, with the growth of production in positive territory for three consecutive months till January. Capital goods output has been relatively lumpy and volatile, and more positive readings are needed to firm up assessment about a durable pick-up in investment demand. The persisting contraction in consumer durables production for over two years could be reflecting the underlying weakness in consumption demand as well as higher imports.

Adverse impact of unseasonal rains and hailstorms in March is still unfolding and according to initial estimates, this has adversely impacted 17 per cent of the sown area under the rabi crop. Services sector emanates mixed signals. Coincident indicators, like railway and port traffic, domestic and international passenger traffic, international freight traffic, tourist arrivals, motorcycle and tractor sales as well as bank credit and deposit growth point to subdued activity in relevant services.

Export performance has been progressively weakening and contraction set in on both non-oil and petroleum product exports since December 2014. Obviously, fragile external demand conditions and the softness in international commodity prices have taken a heavy toll on the country’s export performance.

Projections
CSO has estimated a robust economy pick-up during 2014-15, with GDP growth at GVA valuation put at 7.5 per cent. However, leading and coincident indicators suggest a likely downward revision of this estimate when fuller information on real activity for the last quarter becomes available. RBI projects 7.8 per cent GDP growth for 2015-16, higher by 30 bps than in 2014-15, but with a downward bias to reflect the still subdued indicators of economic activity. Uncertainty surrounding the arrival and distribution of the monsoon and unanticipated global developments are the two major risks to baseline growth projections.

CPI inflation is projected at its current levels in the first quarter of 2015-16, moderating thereafter to around 4 per cent by August but firming up to reach 5.8 per cent by the end of the year.

Even as the Monetary Policy Framework Agreement signed with the Government of India will shape the stance of monetary policy in 2015-16 and succeeding years, the apex bank has stated that it will stay focused on ensuring that the economy disinflates gradually and durably, with CPI inflation targeted at 6 per cent by January 2016 and at 4 per cent by the end of 2017-18. The Reserve Bank will look through both seasonal as well as base effects to appraise inflation scenario.

With this end in view, the apex bank desires continuation and even acceleration of policy efforts to unclog the supply response so as to make available key inputs such as power and land. Further progress on redirecting of public spending from poorly targeted subsidies towards public investment and on reducing the pipeline of stalled investment will also be helpful in containing supply constraints and creating room for monetary accommodation.

KEY MACRO INDICATORS
Indicator
2014-15
2015-16
GDP at basic GVA valuation (y-o-y increase)
7.5
7.9
Gross fixed capital formation/GDPmp (%)
28.6
29.3
Money Supply (y-o-y increase)
12.3
13.5
Bank credit (y-o-y increase)
12
14
Combined fiscal deficit/GDPmp (%)
6.5
6.3
Merchandise trade deficit/GDPmp (%)
6.9
6.3
CAD/GDPmp (%)
1.2
1.0
Source: 33rd Round of Survey of Professional Forecasters.

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