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Third Bi-monthly Monetary Policy Statement 2015-16 By Dr. Raghuram G. Rajan Governor

Third Bi-monthly Monetary Policy Statement, 2015-16 By Dr. Raghuram G. Rajan, Governor - Dated:- 5-8-2015 - 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 7.25 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 und .....

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ement, global economic activity has recovered modestly in Q2 of calendar 2015. The US economy rebounded on stronger consumption growth and steadily improving labour market conditions, though recent wage data suggest continuing slack. The Euro area has grown at a moderate pace through the first half of 2015, supported by consumer spending, easing financing conditions and a modest downturn in still-high unemployment. In Japan, growth slowed in Q2 after an upside surprise in Q1. Domestic consumptio .....

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ebalancing, sizable stock market corrections, a cooling property market and excess capacity in several manufacturing industries. Manufacturing activity weakened further in July, clouding near-term expectations. Recessionary conditions persist in both Russia and Brazil, with downside risks from commodity prices and geopolitical developments casting a shadow on the outlook, including for other EMEs. 3. In recent months, financial markets have experienced high turbulence due to the Greek crisis, th .....

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were dominated by the rising US dollar, which impacted foreign currency borrowing exposures, increased exchange rate volatility and also produced sizable capital outflows from EMEs. Investors have reduced exposures to EMEs as an asset class, but a generalised flight to safety is yet to be seen. Investors have also shunned commodities affected by the Chinese slowdown, including bullion. 4. In India, the economic recovery is still work in progress. After strong rainfall in June, July has been belo .....

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ntly weak rural demand will improve to provide an important boost to activity. Shrinking exports in some industries, in part a result of weak global demand and global overcapacity in those industries and in part a result of the significant depreciation of currencies of some major trading partners against the rupee, also contributed to weak aggregate demand. The Reserve Bank s survey-based indicators point to flat capacity utilisation and new orders, with corporate sales growth declining - althou .....

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egated by structural problems relating to clogging of transmission grids and the dire financial state of electricity distribution companies (DISCOMs). 5. However, there are signs that consumption demand, especially in urban areas, is picking up. Car sales for July were strong. Nominal bank credit growth is lower than previous years, but adjusted for lower inflation as well as for lower borrowing by oil marketing companies and increased borrowing from commercial paper markets, credit availability .....

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in Q2 on the back of an expected increase in turnover and profit margin. 7. Headline consumer price index (CPI) inflation rose for the second successive month in June 2015 to a nine-month high on the back of a broad based increase in upside pressures, belying consensus expectations. The sharp month-on-month increase in food and non-food items overwhelmed the sizable base effect in that month. Food inflation rose 60 basis points over the preceding month, driven by a spike in prices of vegetables .....

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ations of households returned to double digits after two quarters, although those of professional forecasters remained anchored. Rural wage growth was moderate but there are indications of incipient pressures from corporate staff costs. 9. Liquidity conditions have been very easy in June and July. A seasonal reduction in demand for currency and increased spending by Government coupled with structural factors such as low credit deployment relative to the volume of deposit mobilisation contributed .....

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in June. The Reserve Bank also conducted open market sales worth ₹83 billion in the second week of July, essentially in response to lack of demand for longer duration reverse repos. The call money rate remained below the repo rate through July, reflecting comfortable liquidity conditions. 10. Headwinds from weak global demand conditions restrained merchandise exports. The contraction in exports in Q1 of 2015-16, both volume and value, was the steepest since Q2 of 2009-10. The sharp fall in .....

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ital flows such as foreign direct investment and non-resident deposits were sustained. With the shrinking external financing requirement, reserves were built up to an all-time high at the end of June, providing a buffer against adverse global shocks. Policy Stance and Rationale 11. The bi-monthly policy statements of April and June indicated that the accommodative stance of monetary policy will be maintained going forward, but monetary policy actions will be conditioned by (a) fuller transmissio .....

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ipeline of stalled investment; and (d) signs of normalisation of the US monetary policy. In the June statement, it was pointed out that a targeted infusion of bank capital is also warranted so that adequate credit flows to the productive sectors as investment picks up. 12. Since the first rate cut in January, the median base lending rates of banks has fallen by around 30 basis points, a fraction of the 75 basis points in rate cut so far. As loan demand picks up in Q3 of 2015-16, banks will see m .....

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Bank will look through, are expected to pull down headline inflation in July and August. From September, favourable base effects wane. 14. Turning to the balance of inflation risks, most worrisome is the sustained hardening of inflation excluding food and fuel. Moreover, the full effects of the service tax increase, which took effect from June, will feed through over the rest of the year. Some food prices, particularly of protein-rich items, pulses and oilseeds have risen sharply in recent mont .....

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of pulses and oilseeds and prospects of rainfall in August and September according to some forecasters; the effects of the Government s current pro-active supply management to contain shocks to food prices, especially of vegetables, alongside its decision to keep increases in minimum support prices moderate. 15. Relative to the projections of the second bi-monthly statement, inflation projections in this bi-monthly statement are elevated by the higher than expected June observation but reduced b .....

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