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

News and Press Release - Dated:- 2-2-2016 - 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 6.75 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 under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF .....

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ith the ongoing weakening of activity in major emerging market economies (EMEs) outweighing the recovery in some advanced economies (AEs). World trade has remained subdued, held down by anaemic demand, new lows in commodity prices and currency realignments. In the United States, an improving labour market continues to support a consumption-led recovery. Manufacturing activity is sluggish, however, reflecting retrenchment in oil and gas drilling activity and declining exports. In the Euro area, i .....

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sionary conditions, falling currencies, sluggish exports and still high inflation relative to their recent histories. 3. The December calm in global financial markets - suggesting that the normalisation of US monetary policy was fully anticipated - was dispelled in January 2016 by fears of further weakening of the Chinese economy and the depreciation of the Renminbi. Capital outflows from China triggered sell-offs across AEs and EMEs, exacerbating currency declines and heightening volatility. Cr .....

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l growth. The north-east monsoon season ended in December with a deficiency of 23 per cent relative to the long period average (LPA). By end-January, rabi sowing was mildly deficient relative to a year ago, as well as to the quinquennial average in respect of all crops, except coarse cereals. Rural incomes will continue to be supported by allied activities such as dairy and horticulture, which now contribute as much to GDP as food grains. 5. In the first two months of Q3 of 2015-16, industrial a .....

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atively stronger profitability. The Reserve Bank s industrial outlook survey suggests a modest expansion of activity likely in Q4. In January 2016, the manufacturing purchasing managers index (PMI) expanded to a four-month high on, inter alia, resumption of output by firms affected by the December floods as well as on new domestic and export orders. 6. Lead indicators of the services sector are mixed. Construction activity is still tepid, as evidenced by weak growth in cement production, though .....

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December across all constituent categories. While the upturn in December essentially reflected unfavourable base effects, the ongoing seasonal decline in prices of fruits and vegetables could temper headline inflation in the near-term. Prices of cereals recorded modest increases despite the adverse monsoon, indicative of effective supply management. On the other hand, pulses inflation continued to remain elevated, reflecting structural mismatches. 8. CPI inflation excluding food and fuel rose f .....

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conditions tightened in the second half of December with advance tax outflows. Tightness spilled over into January 2016 on the back of a seasonal pick-up in demand for currency, restrained spending by the government and a pick-up in bank credit growth, in relation to deposit mobilisation. In order to mitigate these conditions, the Reserve Bank injected liquidity through variable rate term repos of varying tenors ranging from overnight to 56 days, besides provision through the regular liquidity w .....

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strongly. 10. India s exports remained in contraction mode for the thirteenth successive month in December, although there are indications of a sequential bottoming out. In volume terms too, the rate of decline appears to be moderating. While softer petroleum, oil and lubricants (POL) and commodity prices helped to contain the trade deficit, these benign effects were offset by a spike in the quantum of gold and POL imports. As a consequence, the trade deficit widened during December in relation .....

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ge reserves stood at US$ 347.6 billion - an accretion of US$ 5.9 billion during the current financial year so far. Policy Stance and Rationale 11. Inflation has evolved closely along the trajectory set by the monetary policy stance. With unfavourable base effects on the ebb and benign prices of fruits and vegetables and crude oil, the January 2016 target of 6 per cent should be met. Going forward, under the assumption of a normal monsoon and the current level of international crude oil prices an .....

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and the impact of adverse geo-political events on commodity prices and financial markets add additional uncertainty to the baseline. 12. Prospects for the rabi harvest are improving slowly. The near-term outlook for industrial activity may be constrained by adverse base effects in Q4 and still weak exports, although the pick-up in corporate profitability on the back of declining input costs may provide an offset. Some categories of services are likely to gain momentum on expectations of higher a .....

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ngthening the growth momentum. Yet, still weak domestic private investment demand in a phase of balance sheet adjustments, re-emergence of concerns relating to stalled projects, excess capacity in industry, sluggish external demand conditions dampening export growth could act as headwinds. Based on an assessment of the balance of risks, GVA growth for 2016-17 is projected at 7.6 per cent (Chart 2). 14. In keeping with the Government s Start-up India initiative, the Reserve Bank will take steps t .....

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