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Second Bi-monthly Monetary Policy Statement 2016-17 By Dr. Raghuram G. Rajan Governor

News and Press Release - Dated:- 7-6-2016 - 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 6.5 per cent; keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liabilities (NDTL); and continue to provide liquidity as required but progressively lower the average ex ante liquid .....

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use of contracting industrial activity and exports. Recent indicators of labour market activity have also weakened. In the Euro area, by contrast, Q1 GDP rose strongly on the back of robust consumer spending and recovering employment and business conditions. In Q2 so far, unemployment is falling, albeit slowly, and purchasing managers sentiment is upbeat. In Japan, growth surprised on the upside in Q1, with the economy escaping a technical recession, but industrial activity remains weak and defl .....

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tick in commodity prices is providing some relief to commodity exporters but political events could unsettle investor sentiment and consequently, capital flows could turn volatile again. For commodity importers, net terms of trade gains are moderating. 4. Global financial markets have recorded gains through Q2 of 2016, spurred by risk-on investor sentiment. Portfolio flows are returning, albeit hesitantly, to EME debt and equity markets. The firmness in crude prices that set in around mid-March .....

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the Fed. The yen and the euro have remained strong despite ultra-accommodative monetary policies. Among EMEs, some currencies are trading with an appreciating bias, with the biggest gains recorded by the currencies that had depreciated the most earlier. 5. On the domestic front, the recently released provisional estimate of gross value added (GVA) for 2015-16 marginally scaled down the annual growth rate to 7.2 per cent, on a deceleration of services sector activity in relation to the advance es .....

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ugh rabi procurement was lower in April-May 2016 than a year ago, mid-May food stocks at 58 million tonnes were almost three times the norm for Q1. 6. The index of industrial production decelerated in 2015-16, mainly pulled down by weak manufacturing in an environment of subdued investment demand and weak rural consumption. In May 2016, the manufacturing purchasing managers index (PMI) remained subdued on account of slowing output and export orders. However, except for natural gas and crude oil, .....

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ks - both domestic and external. These developments have improved the expectation of business conditions in the first half of 2016-17. Public investment, especially in roads and railways, is gaining strength, though the continuing weakness in private investment is of concern. Demand conditions are likely to improve going forward; consumer confidence is seen as rising on improving expectations of employment and spending, with rural demand aided by a stronger monsoon. Rising capacity utilisation s .....

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ailway freight traffic and passenger car sales have decelerated on sector-specific constraints. Purchasing managers in the services sector indicated slowing new business in May and subdued expectations of future activity. 8. The ebbing of inflation pressures for two consecutive months to March, after a period of steady rise, was interrupted once again in April. Retail inflation measured by the consumer price index (CPI) rose more sharply than expected due to a more-than-seasonal jump in food pri .....

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Cereal inflation, however, remained subdued, reflecting supply management efforts that expanded offtake from food stocks. Inflation in respect of the fuel group eased mainly due to firewood and stronger deflation in respect of LPG prices. Reflecting these recent inflation dynamics, three-months-ahead inflation expectations of households moved up marginally in May. 9. CPI inflation excluding food and fuel edged up in April, driven by prices of petrol and diesel embedded in transport and communica .....

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rency demand during the first two months of the financial year and build-up of cash balances by the Government from the second week of May tightened liquidity conditions from mid-May. In order to mitigate these pressures, the Reserve Bank injected liquidity through purchases under open market operations (OMOs) of ₹ 700 billion during April-May in pursuance of the revised liquidity management framework outlined in the April bi-monthly policy statement. Additionally, liquidity was injected t .....

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of +/- 50 basis points around the policy repo rate. Volatility also declined significantly. Interest rates on money market instruments such as certificates of deposit (CDs) and commercial paper (CPs) also eased through the quarter so far. 11. Exports declined for the seventeenth consecutive month in April in US dollar terms in spite of a modest increase in volume. The fall in crude oil prices led to lower export realisations from petroleum products (POL), although the volume of shipments of pet .....

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ts also declined, essentially reflecting lower prices. Accordingly, the trade deficit narrowed sequentially and was less than half its level a year ago. Portfolio flows resumed in April and May. The level of foreign exchange reserves rose to US $ 360 billion by May 27, 2016. Policy Stance and Rationale 12. The inflation surprise in the April reading makes the future trajectory of inflation somewhat more uncertain. The expectations of a normal monsoon and a reasonable spatial and temporal distrib .....

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ntral Pay Commission awards which will have to be factored into projections as soon as clarity on implementation emerges; the upturn in inflation expectations of households and of corporates; and the stickiness in inflation excluding food and fuel. Taking these factors into account, the inflation projections given in the April policy statement are retained, though with an upside bias. Considerable uncertainty surrounds these projections (Chart 1), which should be clarified by incoming data in th .....

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