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Fourth Bi-monthly Monetary Policy Statement 2015-16 by Dr. Raghuram G. Rajan Governor

Dated:- 29-9-2015 - Part A: Monetary Policy 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 50 basis points from 7.25 per cent to 6.75 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 liability (NDTL); continue to provide liquidity under overnight .....

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of August 2015, global growth has moderated, especially in emerging market economies (EMEs), global trade has deteriorated further and downside risks to growth have increased. In the United States, industrial production slowed as capital spending in the energy sector was cut back and exports contracted, weighed down by the strength of the US dollar. Consumer spending stayed buoyant, however, amidst steadily improving labour market conditions. In the Euro area, a fragile recovery strengthened, s .....

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nts. China s intended rebalancing from investment towards consumption is being hit by the stock market meltdown, slower industrial production and weaker exports. The devaluation of the renminbi on August 11, while mild, has unsettled financial markets across the world. Brazil and Russia are grappling with recession and runaway inflation, while South Africa is facing tightening structural constraints which threaten to tip it into a downturn. 3. Since the Chinese devaluation, equity prices, commod .....

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ly, but overall financial conditions are yet to stabilise. 4. In India, a tentative economic recovery is underway, but is still far from robust. In agriculture, sown area has expanded modestly from a year ago, reflecting the timely and robust onset of the monsoon in June, but the southwest monsoon is currently deficient by 14 per cent - with production-weighted rainfall deficiency at 20 per cent. Nevertheless, the first advance estimates indicate that food grain production is expected to be high .....

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with industrial activity slowing sequentially in July, although it has been in expansionary mode for the ninth month in succession. Industries such as apparel, furniture and motor vehicles have experienced acceleration. Furthermore, the resumption of growth in production of consumer durables in recent months, after a protracted period of contraction over the last two years, is indicative of some pick-up in consumption demand, primarily in urban areas. Since our last review, however, external de .....

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ve more than offset the effect of higher margins to hold back new investment intentions. The expansion in capital goods production, therefore, likely relates more to the revival of stalled projects than to a build-up of the green field pipeline. Survey-based business sentiment has been falling in recent quarters. The manufacturing purchasing managers index (PMI) nevertheless remained in expansion territory in August, although it slowed from July due to weak domestic and export order books. 7. In .....

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ions remain subdued. 8. Headline consumer price index (CPI) inflation reached its lowest level in August since November 2014. The ebbing of inflation in the year so far is due to a combination of low month-on-month increases in prices and favourable base effects. Overall year-on-year food inflation dropped sharply, led by vegetables and sugar. Cereal inflation moderated steadily during April-August, but price pressures in respect of pulses and onions remained elevated. 9. CPI inflation excluding .....

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s likely in response to recent month-on-month increases in the prices of vegetables and pulses. Professional forecasters inflation expectations eased as credibility built around the January 2016 inflation target. Rural wage growth remains subdued and corporate staff costs decelerated. 10. Liquidity conditions eased considerably during August to mid-September. In addition to structural factors such as deposit mobilisation in excess of credit flow, lower currency demand and pick-up in spending by .....

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e system from mid-September, deficit conditions returned and the Reserve Bank engaged in average net injections of the order of ₹544 billion (September 16 to 27), keeping the call money rate close to the repo rate. Some forms of bank credit such as personal loans grew strongly as did non-bank financing flows through commercial paper, public equity issues and housing finance. 11. With the weakening of growth prospects in EMEs and world trade volume growth falling below world GDP growth, Ind .....

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ease in the current account deficit (CAD) during Q2. Net capital inflows were buoyed by sustained foreign direct investment and accretion to non-resident deposits, and reduced by portfolio outflows, mainly from equity markets. Foreign exchange reserves rose by US $ 10.4 billion during the first half of 2015-16. Policy Stance and Rationale 12. In the bi-monthly policy statement of August, the Reserve Bank indicated that further monetary policy accommodation will be conditioned by the abating of r .....

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ent peak in June. The Federal Reserve has postponed policy normalisation. Markets have transmitted the Reserve Bank s past policy actions via commercial paper and corporate bonds, but banks have done so only to a limited extent. The median base lending rates of banks have fallen by only about 30 basis points despite extremely easy liquidity conditions. This is a fraction of the 75 basis points of the policy rate reduction during January-June, even after a passage of eight months since the first .....

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n should continue to put downward pressure on the prices of sugar and edible oil, and food inflation more generally. It is important that pro-active supply-side management by the government be in place to head off any food price pressures should they materialise, especially in respect of onion and pulses. The pass-through of the recent depreciation of the rupee will have to be carefully monitored, although benign crude prices should have an offsetting effect. Taking all this into consideration, .....

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than expected momentum in industrial production and investment activity. With global growth and trade slower than initial expectations, a continuing lack of appetite for new investment in the private sector, the constraint imposed by stressed assets on bank lending and waning business confidence, output growth projected for 2015-16 is marked down slightly to 7.4 per cent from 7.6 per cent earlier (Chart 2). Concurrent indicators also suggest that the new GDP series shows higher growth than woul .....

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inging inflation to around 5 per cent by the end of fiscal 2016-17. In this context, the weakening of global activity since our last review suggests that commodity prices will remain contained for a while. Still-low industrial capacity utilisation indicates more domestic demand is needed to substitute for weakening global demand in order that the domestic investment cycle picks up. The coming Pay Commission Report could add substantial fiscal stimulus to domestic demand, but the government has r .....

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etary stimulus in the pipeline, even if transmission is slow. Therefore, the Reserve Bank has front-loaded policy action by a reduction in the policy rate by 50 basis points. Given our year-ahead projections of inflation, this ensures one year expected Treasury bill real interest rates of about 1.5-2.0 per cent, which are appropriate for this stage of the recovery. 16. While the Reserve Bank s stance will continue to be accommodative, the focus of monetary action for the near term will shift to .....

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nk s measures to strengthen the monetary policy framework, make banking structure and practices more efficient, broaden and deepen financial markets, deal with stress in corporate and financial assets, and extend the reach of financial services to all. I. Monetary Policy Framework 19. Discussions on monetary policy and its institutional and operating framework are set out in Part A of this Statement and the Monetary Policy Report issued along with this Statement. II. Banking Structure 20. The Re .....

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This would also de-risk the balance sheets of banks. Specifically, the paper proposed ways to encourage large corporates with borrowings from the banking system above a cut-off level to tap the market for their working capital and term loan needs. Based on suggestions received from stakeholders, the Reserve Bank will issue a draft circular by end-December 2015. 22. As a part of its supervisory process, the Reserve Bank assesses compliance by banks with extant prudential norms on income recognit .....

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eing issued separately. 23. The Union Budget for 2014-15 emphasised the urgent need for convergence of the current Indian accounting standards (IND AS) with International Financial Reporting Standards (IFRS). The Reserve Bank has recommended to the Ministry of Corporate Affairs a roadmap for the implementation of IND AS by banks and non-banking financial companies from 2018-19 onwards. The Reserve Bank constituted a Working Group (Chairman: Shri Sudarshan Sen) for its implementation. The Report .....

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idual housing loans. Detailed guidelines are being issued separately. 25. Banks are permitted to hold investments under the HTM category in excess of the limit of 25 per cent of their total investments, provided the excess comprises only SLR securities and the total SLR securities held under the HTM category are not more than 22 per cent of NDTL. The SLR has been reduced to 21.50 per cent of NDTL with effect from February 7, 2015. To align them, it has been decided to bring down the ceiling on S .....

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is of proposals intended to promote depositors interests. In response to the press release issued on January 9, 2015, the Reserve Bank received 90 applications for financial assistance. The names of successful applicants will be announced by October 1, 2015. The window for inviting applications for availing financial assistance from the fund shall be re-opened. 27. The report of the High Powered Committee (HPC) on UCBs (Chairman: Shri R. Gandhi) to examine and recommend permissible business line .....

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rabilities have emerged. The Reserve Bank is setting up an information technology (IT) subsidiary to assist in monitoring the preparedness of banks and identifying systemic vulnerabilities along with aiding the Reserve Bank in its own cyber initiatives. 29. The Reserve Bank will update all its master regulations, and streamline the required procedure for compliance with the regulations by January 1, 2016. All master regulations will be fully updated and placed online. The Reserve Bank will also .....

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es will be increased in phases to 5 per cent of the outstanding stock by March 2018. In aggregate terms, this is expected to open up room for additional investment of ₹1,200 billion in the limit for central government securities by March 2018 over and above the existing limit of ₹1,535 billion for all government securities (G-sec). (iii) Additionally, there will be a separate limit for investment by FPIs in the State Development Loans (SDLs), to be increased in phases to reach 2 per .....

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October 12, 2015 and January 1, 2016. Each tranche would entail an increase in limits as under: ₹ 130 billion for central government securities composed of ₹ 75 billion for long term investors and ₹ 55 billion for others ₹ 35 billion for SDL open to all FPI investors. A circular with details of the MTF is being issued separately. 31. In the first bi-monthly monetary policy statement for 2015-16, announced on April 07, 2015, it was proposed to permit Indian corporates tha .....

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riction on the end use of funds except a small negative list. Detailed instructions are being issued separately. 32. The Reserve Bank has placed the draft framework on ECB on its website on September 23, 2015 for comments/ feedback. The revised framework suiting the current economic and business environment will replace the extant ECB policy. 33. Scheduled commercial banks and primary dealers (PDs) are currently permitted to execute the sale leg of short sale transactions in the over the counter .....

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H as a cover transaction. Guidelines in this regard will be issued by end-October 2015. 34. There has been significant improvement in market infrastructure in the inter-bank repo market in G-sec. This enables Reserve Bank to review restrictions placed on repo transactions, particularly relating to the participation of gilt account holders in the repo market, guided by the recommendations of the Working Group on Enhancing Liquidity in the Government Securities and Interest Rate Derivatives Market .....

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reissued securities, subject to limits and other conditions in place from time to time; and (ii) permit regulated entities other than banks and primary dealers (PDs) to take long positions in the WI market. Detailed guidelines in this regard will be issued by end-November 2015. 36. Guidelines on repo in corporate debt were issued in January 2010. In order to further develop the repo market, a broad framework for introduction of electronic dealing platform/s for repo in corporate bonds will be d .....

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s in the G-sec market. Guidelines in this regard will be issued by end-November 2015. 38. At present, exchange traded currency derivatives include futures and options in four currency pairs viz., USD-INR, EUR-INR, GBP-INR and JPY-INR. With a view to enabling direct hedging of exposures in foreign currencies and to permit execution of cross-currency strategies by market participants, exchange traded currency futures and options will be introduced in three cross-currency pairs viz., EUR-USD, GBP-U .....

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