Fourth Bi-Monthly Monetary Policy Statement, 2014-15 By Dr. Raghuram G. Rajan, Governor, RBI - September 30, 2014 - Full Text

Part A: Monetary Policy

Policy Stance and Rationale

8. Since June, headline inflation has ebbed to levels which are consistent with the desired near-term glide path of disinflation -- 8 per cent by January 2015. The most heartening feature has been the steady decline in inflation excluding food and fuel, by a cumulative 111 basis points since January 2014, to a new low. With international crude prices softening and relative stability in the foreign exchange market, some upside risks to inflation are receding. Yet, there are risks from food price shocks as the full effects of the monsoon’s passage unfold, and from geo-political developments that could materialise rapidly. 9. For the near-term objective, therefore, the risks around the baseline path of inflation are broadly balanced, though with a slant to the downside (Chart 1). However, the undershooting of the objective may be temporary because of base effects. Turning to the medium-term objective (6 per cent by January 2016) the balance of risks is still to the upside, though somewhat lower than in the last policy statement. This continues to warrant policy preparedness to contain pressures if the risks materialise. Therefore, the future policy stance will be influenced by the Reserve Bank’s projections of inflation relative to the medium term objective (6 per cent by January 2016), while being contingent on incoming data.

10. The momentum of activity in all sectors of the economy is yet to stabilize. Agriculture should shed the effects of recent shocks and pick up in Q4 of 2014-15. Industrial activity will await improvement in the business environment and the resumption of consumption and investment demand before gaining sustained speed. Post-monsoon revival in construction activity and the likely strengthening of momentum in business and financial services should sustain the recent signs of expansion in the services sector. The key to a turnaround in the growth path of the economy in the second half of the year is a revival in investment activity – in greenfield as well as brownfield stalled projects – supported by fiscal consolidation, stronger export performance and sustained disinflation. With expectations of these conditions remaining broadly unchanged, the projection of growth for 2014-15 is retained at 5.5 per cent within a range of 5 to 6 per cent around this central estimate. The quarterly growth path may slow mildly in Q2 and Q3 before recovering in Q4.

11. With liquidity conditions easing, the recourse to ECR has fallen off substantially to about 10 per cent of the outstanding export credit eligible for refinance. Accordingly, in pursuance of the Dr. Urjit R. Patel Committee’s recommendation to move away from sector-specific refinance, the access to the ECR is being brought down to 15 per cent of the eligible export credit, thus continuing to give banks room for manoeuvre. This will be in effect from October 10, 2014.

12. The fifth bi-monthly monetary policy statement is scheduled on Tuesday, December 2, 2014.

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