India Leaves Monetary Policy Unchanged

The Reserve Bank of India left the benchmark repo rate on hold at 8 percent on December 2nd, saying a change in monetary policy in current conditions is premature. However, policymakers added that adjustments may occur next year if inflation continues to ease and fiscal developments are encouraging.

The cash reserve ratio was left on hold at 4 percent of net demand and time liabilities (NDTL). Policy makers also decided to continue to provide liquidity under overnight repos at 0.25 percent of bank-wise-NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system through auctions and continue with daily one-day term repos and reverse repos to smooth liquidity. Consequently, the reverse repo rate under the LAF will remain unchanged at 7.0 percent, and the marginal standing facility (MSF) rate and the Bank Rate at 9.0 percent.

Excerpts from the statement by Dr. Raghuram G. Rajan, Governor:

Retail inflation, as measured by the consumer price index (CPI), has decelerated sharply since the fourth bi-monthly statement of September. This reflects, to some extent, transitory factors such as favourable base effects and the usual softening of fruits and vegetable prices that occurs at this time of the year. On the other hand, protein-rich items such as milk and pulses continue to experience upside pressures, reflecting structural mismatches in supply and demand. The absence of adequate administered price revisions in inputs like electricity has contributed to the easing of inflation in the fuel group.

Consistent with the balance of risks set out in the fourth bi-monthly monetary policy statement of September, headline inflation has been receding steadily and current readings are below the January 2015 target of 8 per cent as well as the January 2016 target of 6 per cent. The inflation reading for November – which will become available by mid-December – is expected to show a further softening. Thereafter, however, the favourable base effect that is driving down headline inflation will likely dissipate and inflation for December (data release in mid-January) may well rise above current levels.
Turning to the outlook for inflation in the medium-term, projections at this stage will be contingent upon expectations of a normal south-west monsoon in 2015, international crude prices broadly around current levels and no change in administered prices in the fuel group, barring electricity. Over the next 12-month period, inflation is expected to retain some momentum and hover around 6 percent, except for seasonal movements, as the disinflation momentum works through. Accordingly, the risks to the January 2016 target of 6 percent appear evenly balanced under the current policy stance.

Still weak demand and the rapid pace of recent disinflation are factors supporting monetary accommodation. However, the weak transmission by banks of the recent fall in money market rates into lending rates suggests monetary policy shifts will primarily have signaling effects for a while. Nevertheless, these signaling effects are likely to be large because the Reserve Bank has repeatedly indicated that once the monetary policy stance shifts, subsequent policy actions will be consistent with the changed stance. There is still some uncertainty about the evolution of base effects in inflation, the strength of the on-going disinflationary impulses, the pace of change of the public’s inflationary expectations, as well as the success of the government’s efforts to hit deficit targets. A change in the monetary policy stance at the current juncture is premature. However, if the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle

India Leaves Monetary Policy Unchanged

RBI l Rida l
12/2/2014 11:47:40 AM