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Second Bi-monthly Monetary Policy Statement, 2015-16 Dr. Raghuram G. Rajan, Governor

Second Bi-monthly Monetary Policy Statement, 2015-16 Dr. Raghuram G. Rajan, Governor - Dated:- 2-6-2015 - Monetary and Liquidity Measures On the basis of an assessment of the current and evolving macroeconomic situation, it has been decided to: reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.5 per cent to 7.25 per cent with immediate effect; keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time .....

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nk Rate to 8.25 per cent. Assessment 2. Since the first bi-monthly monetary policy statement of 2015-16 issued in April 2015, incoming data suggest that the global recovery is still slow and getting increasingly differentiated across regions. In the United States, the economy shrank in Q1 owing to harsh weather conditions, the strength of the US dollar weighing on exports and a decline in non-residential fixed investment. In the euro area, financial conditions have eased due to the European Cent .....

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ket turbulence. China continues to decelerate in spite of monetary easing. The recent firming up of crude prices has reduced headwinds to growth for some energy exporters, while increasing them for importers. Even absent a decisive economic recovery or adverse geopolitical shocks, oil prices appear to be volatile. 3. Global financial markets have also been volatile, with risk-on risk-off shifts induced by changing perceptions of monetary policies in the advanced economies. Global currency market .....

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has revised downwards its estimate of India s gross value added (GVA) at basic prices for 2014-15 by 30 basis points from the advance estimates. Domestic economic activity remains moderate in Q1 of 2015-16. Agricultural activity was adversely affected by unseasonal rains and hailstorms in north India during March 2015, impinging on an estimated 94 lakh hectares of area sown under the rabi crop. Reflecting this, the third advance estimates of the Ministry of Agriculture indicate a contraction in .....

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e long period average. This has been exacerbated by the confirmation of the onset of El Nino by the Australian Bureau of Meteorology. 5. What is clear is that contingency plans for food management, including storage of adequate quantity of seeds and fertilisers for timely supply, crop insurance schemes, credit facilities, timely release of food stocks and the repair of disruptions in food supply chains, including through imports and de-hoarding, need to be in place to manage the impact of low pr .....

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lisation has been falling in several industries, indicative of the slack in the economy. While an upturn in capital goods production seems underway, clear evidence of a revival in investment demand will need to build on the tentative indications of unclogging of stalled investment projects, stabilising of private new investment intentions and improving sales of commercial vehicles. In April, output from core industries constituting 38 per cent of the index of industrial production declined acros .....

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indicators of services sector activity are emitting mixed signals. A pick-up in service tax collections, sales of trucks, railway freight, domestic air passenger and air freight traffic could augur well for transport and communication and trade. On the other hand, the slowdown in tourist arrivals, railway traffic and international air passenger and freight traffic could affect hotels, restaurants and some constituents of transportation services adversely. The services PMI declined in April 2015, .....

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ains yet to show up. Vegetables inflation continued to ease, along with that of other sub-groups such as cereals, oil, sugar and spices. On the other hand, protein items, especially milk and pulses, continued to impart upward inflationary pressures. 9. Fuel inflation rose for the fourth successive month to a twelve-month high, driven by prices of electricity and firewood. Inflation in these components was accentuated by base effects - the recent price uptick coming on top of muted increases a ye .....

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e these developments. 10. Liquidity conditions eased in April 2015 after the tightness in the second half of March 2015 on account of advance tax outflows and financial year-end behaviour of banks. The Reserve Bank s liquidity management operations were reversed in view of the improvement in liquidity conditions through April. During May, however, rapid increases in currency in circulation and a build-up of government balances resulted in liquidity conditions tightening again. Accordingly, fine .....

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e. Longer term interest rates, particularly gilts, hardened in early May on international cues but eased in the second half of the month, particularly after the issuance of the new benchmark bond. 11. Merchandise export growth has weakened steadily since July 2014 and entered into contraction from January 2015 through April, with a recent shrinking of even volumes exported. The deterioration in export performance affected economies across Asia as global demand fell and the fall in commodity pric .....

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nt deficit resulting from the sharp decline in oil prices has begun to reverse, though the size of the deficit is expected to be contained to about 1.5 per cent of GDP this year. Net exports are, therefore, unlikely to contribute as much to growth going forward as they did in the past financial year. Consequently growth will depend more on a strengthening of domestic final demand. While portfolio and direct foreign investment flows were buoyant during 2014-15, with net foreign direct investment .....

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ne inflation has evolved along the projected path, the impact of unseasonal rains has been moderate so far, administered price increases remain muted, and the timing of normalisation of US monetary policy seems to have been pushed back. With low domestic capacity utilization, still mixed indicators of recovery, and subdued investment and credit growth, there is a case for a cut in the policy rate today. 13. Yet, of the risks to inflation identified in April, three still cloud the picture. First, .....

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turns out to be weak. With still weak investment and the need to reduce supply constraints over the medium term to stay on the proposed disinflationary path (to 4 per cent in early 2018), however, a more appropriate stance is to front-load a rate cut today and then wait for data that clarify uncertainty. Meanwhile banks should pass through the sequence of rate cuts into lending rates. 14. Assuming reasonable food management, inflation is expected to be pulled down by base effects till August bu .....

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