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CHAPTER NO: 1INTRODUCTION

INTRODUCTIONThe central bank is the apex institution of a countrys monetary system. Thus central bank is a bank which is established to control and regulate the monetary and credit system in the country. The Reserve Bank of India serves as the central bank of India. Reserve Bank of India was established in 1st April 1935 under the R.B.I. act, 1934. The bank was nationalised on 1st January 1949.

Definition by A. C. H. Day A central bank is to help control and stabilise the monetary and banking system".

INSTRUMENTS OF MONETARY POLICYQUANTITATIVE STEPSIt refers to the steps aimed at controlling credit by checking the quantity of money in circulation. 1) Bank Rate Policy. Bank rate is the rate at which Central Bank rediscount bills of Commercial Banks and provides financial assistance to commercial bank.

During inflation Central Bank follows the dear money policy. It increases the bank rate and thereby makes borrowing costly. This will discourage the commercial bank from the obtaining funds from the central bank. When bank rate increases, the rate of interest prevailing in the money market will also increase. Thus the borrowers will have to pay high rate of interest and their tendency to demand credit will decline. It leads to contraction of supply of credit money and reduces investment.

Such a reduction in business activities results in contraction of factor rewards which in turn brings the effective demand down. As demand declines price will fall and inflation is controlled..

During deflation the bank will follow cheap money policy and the bank rate will be reduced. As a result the rate of interest collected by the Commercial Banks will also fall. This will encourage the business community to demand more loans and it leads to expansion of credit.

This would put deflation under check.

(2) Open market operations. It refers to buying and selling of securities and other eligible papers by Central Bank in the open Market

The Central Bank can create contraction and expansion of credit by selling and buying securities. It can control the credit money by selling securities and eligible papers in the open market. When it sells securities, money flows into Central Bank. It reduces the volume of deposits received by the commercial banks and contracts credit.

It can expand credit by buying securities from the market. It results in large volume of circulation of money among commercial banks.

Superiority. Open market operation technique is superior to Bank Rate Policy. First of all, Central Bank need not depend upon commercial banks for the success of open market operation. By knowing their reserve position. Central Bank of India can directly influence the commercial banks.

Secondly open market operation is successful when government borrows money from public during inflation. As the volume of public debt has been expanding, Government can successfully sell its securities to the public.

(3) Varying Cash reserve ratio. This is another weapon used by the Central Bank to control credit. cash reserve is the ratio upon which all commercial banks have to keep certain proportion of their demand and time deposit with the Central Bank. it is a legal tradition which every commercial bank has to follow.

The reserves left with commercial banks after meeting minimum reserves is known as excess reserves. This has a direct impact on the capacity of banks to create credit. When the central bank raises the cash reserve ratio, the ability of the commercial banks to create credit is curtailed. When the cash reserve ratio is brought down, the ability of commercial banks to create credit widens. QUALITATIVE MEASURES OR SELECTIVE CREDIT CONTROLIt refers to the steps aimed at controlling credit by checking the allocation of credit. Such steps check the purpose for which credit money is used. They encourage credit money for socially desirable and productive purposes and restrict the same towards undesirable and non-productive areas.

1) Issuing directives.

i) Purpose on which advances can be granted.

ii) Margin requirements against securities

iii) Maximum limit regarding advances granted to any borrower.

iv) Terms and conditions including the rate of interest for granting loans.

2) Margin requirements. A bank requires security such as gold, shares, property against loans sanctioned. No bank gives loan equal to the market value of the security. Suppose if a person produces security worth of Rs. 30,000, he may be given a loan say Rs. 25,000. This difference between the value of security and the actual amount of loan is known as margin. Central Bank will use this margin to check the flow of credit money into undesirable sectors. It may direct the commercial bank to keep higher margin towards loans a against stock of foodgrains, equity shares etc.

3) Regulation of consumer credit. Commercial Banks often adyance loans to consumers for durable luxury goods like T.V. Refrigerator, etc. central Bank can regulate consumer loans by directing the Commercial Bank to raise the minimum down payment and shorten the maximum period of repayments i.e. installments may be reduced

4) Rationing of credit. Central bank can also regulate the volume of credit by imposing ceiling on different types of loans provided by the commercial banks. It checks the flow of money into undesirable uses.

5)Moral suasion. It refers to the general appeal or request made by the central bank persuading the commercial bank to co-operate with the central bank in controlling credit.

6) Direct actionThe central bank also resorts to hard measure to control the erring commercial bank. Such steps include suspending the activities of the commercial bank, refusal of renewal of license, refusing financial assistance to commercial banks etc.

CHAPTER NO: 2CONCEPTUAL DATA

Sixth Bi-Monthly Monetary Policy Statement, 2014-15 By Dr. Raghuram G. Rajan, Governor, RBI - Feb 03, 2015 Part A: Monetary PolicyMonetary and Liquidity MeasuresOn 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 7.75 per cent;Keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liabilities (NDTL); Reduce the statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points from 22.0 per cent to 21.5 per cent of their NDTL with effect from the fortnight beginning February 7, 2015;Replace the export credit refinance (ECR) facility with the provision of system level liquidity with effect from February 7, 2015;continue to provide liquidity under overnight repos of 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system through auctions; andContinue with daily variable rate term repo and reverse repo auctions to smooth liquidity.

Consequently, the reverse repo rate under the LAF will remain unchanged at 6.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 8.75 per cent.Assessment2. Since the fifth bi-monthly monetary policy statement of December 2014, the International Monetary Fund (IMF) has revised its forecasts for growth in 2015 and 2016 downwards. However, these forecasts are higher than the estimates for 2014. In the United States, growth moderated towards the end of 2014, with the boost to consumption demand from the fall in crude prices more than offset by the drag on net exports from a strong US dollar. In the Euro area, economic conditions have deteriorated in an environment of deflationary pressures, political tensions in Greece and still-elevated levels of unemployment. Demand in Japan is only just beginning to recover from the impact of the consumption tax increase last year, notwithstanding massive monetary and fiscal accommodation. The yens depreciation, however, is helping support exports. In China, growth is slowing because of a weakening property market and excess capacity in several industries. This has prompted targeted measures to ease financial constraints faced by corporations and banks. In other emerging market economies (EMEs), growth has weakened sharply for oil exporters, whereas inflationary pressures, subdued investment appetite and a neutral fiscal stance continue to dampen growth in non-oil exporters.

3. The announcement of massive quantitative easing by the European Central Bank (ECB) in late January has reinvigorated financial risk taking, boosting stock markets across the world, even though many market participants have read the softness in crude prices and the ECBs announcement as signifying a weaker global economic outlook. Along with the growing belief that the US Fed will stay on hold longer than previously thought, bond yields in advanced economies (AEs) have fallen to historic lows. Financial markets remain vulnerable to uncertainty surrounding monetary policy normalization in AEs as well as possibly weaker growth in China and oil exporting EMEs.

4. The revision in the base year for GDP and GDP calculation methods will mean some revision in GDP growth numbers for 2014-15 as well as in GDP forecasts. Domestic activity is likely to have remained subdued in Q3 of 2014-15, mainly reflecting the shortfall in the kharif harvest relative to a year ago. Agricultural growth is likely to pick up in Q4 with the late improvement in the north-east monsoon and in rabi sowing. Nevertheless, growth expectations should be tempered as lead indicators such as tractor and motorcycle sales and slowing rural wage growth all point to subdued rural demand.

5. The improvement in industrial activity in November 2014 was broad-based, but continuing contraction in consumer goods production underscores the persisting weakness in consumption demand (even while raising questions about measurement of production). Advance indicators of industrial activity - indirect tax collections; non-oil non-gold import growth; expansion in order books; and new business reported in purchasing managers surveys - point to a modest improvement in the months ahead. Policy initiatives in land acquisition, as well as efforts underway to unlock mining activity and to widen the space for foreign direct investment in defence, insurance and railways, should create a more conducive setting for industrial revival. Faster clearances are also helping in resuscitating stalled projects. The improvement in business confidence is visible in a pick-up in new investment intentions, especially in transportation, power and manufacturing.

6. In the services sector, the purchasing managers survey indicates slower activity, especially in new orders. However, other indicators of the services sector including foreign tourist arrivals, automobile sales, cargo handled at ports, and railway freight traffic suggest improvement. Overall, growth prospects will be contingent upon a turnaround in investment and a durable improvement in the business climate to complement the upsurge in business optimism. The sharp reduction in oil prices as well as in inflation is likely to increase personal disposable incomes and improve domestic demand conditions in the year ahead.7. Retail inflation, measured by year-on-year changes in the consumer price index (CPI), edged up in December on the expected reversal of favourable base effects that had tempered upside pressures since June. A slight softening of cereal prices and a sharp seasonal fall in vegetables prices moderated the trajectory of headline inflation, despite persistent firmness in the prices of protein-rich items such as milk, meat and pulses. However, seasonal increases in vegetable prices, which typically set in around March, have to be monitored carefully. In the fuel category, prices of constituents such as electricity, coal and cooking gas remained stable in the absence of administered revisions. Consequently, the CPI registered a monthly decline for the first time since February 2014.

8. Inflation excluding food and fuel declined for the second consecutive month in December. This was largely on account of the declining prices of transport and communication since August, reflecting the impact of plummeting international crude oil prices; and softer commodity prices more generally. Inflation in respect of miscellaneous services and housing, however, declined more moderately. Weak domestic demand has restrained corporates pricing power and inflationary pressures in the non-food non-fuel category. Near-term as well as longer-term inflation expectations of households dropped to single digits for the first time in 21 quarters. Benign expectations are also mirrored in surveys of professional forecasters and industry conducted periodically by the Reserve Bank.

9. Active liquidity management operations under the revised framework adopted in early September have ensured that liquidity conditions have generally remained comfortable. Money market rates have evolved in close alignment with the policy repo rate, excluding occasional pressures around days of advance tax outflows and quarter-end tightness. Overnight variable rate repo/reverse repo auctions announced early in the day give markets advance intimation of the Reserve Banks assessment on system-wide liquidity needs for the day, allowing fine tuning of liquidity. This also reduces the need for other sector specific windows. The average daily net borrowings under the LAF (including term repos, reverse repos and MSF) have been around `850 billion in December and January.

10. Easing inflationary pressures strengthened the impact of comfortable liquidity conditions on market interest rates; sovereign and corporate bond yields declined by 50 basis points and more in Q3. However, despite a generalised fall in the cost of funds, banks have yet to pass through these effects, as also the effects of the policy rate cut on January 15, into the spectrum of lending rates.

11. With the slump in international crude prices taking its toll on exports of petroleum products, and non-oil export growth also decelerating sharply, merchandise exports shrank in Q3 of 2014-15 after two consecutive quarters of growth. Export performance has been hamstrung by weak global demand conditions and the persisting fall in unit value realisations. The real appreciation of the rupee may also have had some effect. The fall in international crude prices translated into a sizable saving on account of POL imports, despite a pick-up in import volumes in Q3. Gold imports also moderated, coming off the seasonal cum pent-up demand spurt in September-November. On the other hand, non-oil non-gold import growth remained firm and in positive territory, extending a run that began in May. Although overall imports declined in December, they recorded an expansion for Q3 as a whole on the back of the earlier rise in gold and non-oil non-gold items. As a consequence, the trade deficit widened in Q3 relative to the preceding quarter. The estimate of the current account deficit (CAD) for 2014-15 is currently placed at 1.3 per cent of GDP, significantly lower than earlier projections. The CAD has been comfortably financed by net capital inflows, mainly in the form of buoyant portfolio flows but also supported by foreign direct investment inflows and external commercial borrowings. Accordingly, there was accretion to Indias foreign exchange reserves to the tune of USD 6.8 billion in Q3.

Policy Stance and Rationale12. By and large, inflation dynamics have so far been consistent with the assessment of the balance of risks by the Reserve Banks bi-monthly monetary policy statements, although with some undershooting relative to the projected path of disinflation. While inflation declined faster than expected due to favourable base effects during June-November, the upturn in December turned out to be muted relative to projections. Augmenting these data with survey data on falling inflationary expectations as well as data on weak commodity prices and muted rural wage growth, the Reserve Bank projected that it would meet its objective of 6 per cent CPI inflation by January 2016. Having committed in public statements to initiate a change in the monetary policy stance as soon as incoming data permitted, the Reserve Bank cut the policy rate on January 15, 2015.

13. The Reserve Bank also indicated that key to further easing are data that confirm continuing disinflationary pressures. Also critical would be sustained high quality fiscal consolidation. Given that there have been no substantial new developments on the disinflationary process or on the fiscal outlook since January 15, it is appropriate for the Reserve Bank to await them and maintain the current interest rate stance.

14. The upside risks to inflation stem from the unlikely possibility of significant fiscal slippage, uncertainty on the spatial and temporal distribution of the monsoon during 2015 as also the low probability but highly influential risks of reversal of international crude prices due to geo-political events. Heightened volatility in global financial markets, including through the exchange rate channel, also constitute a significant risk to the inflation assessment. Looking ahead, inflation is likely to be around the target level of 6 per cent by January 2016 (Chart 1). As regards the path of inflation in 2015-16, the Reserve Bank will keenly monitor the revision in the CPI, which will rebase the index to 2012 and incorporate a more representative consumption basket along with methodological improvements.

15. The outlook for growth has improved modestly on the back of disinflation, real income gains from decline in oil prices, easier financing conditions and some progress on stalled projects. These conditions should augur well for a reinvigoration of private consumption demand, but the overall impact on growth could be partly offset by the weaker global growth outlook and short-run fiscal drag due to likely compression in plan expenditure in order to meet consolidation targets set for the year. Accordingly, the baseline projection for growth using the old GDP base has been retained at 5.5 per cent for 2014-15. For 2015-16, projections are inherently contingent upon the outlook for the south-west monsoon and the balance of risks around the global outlook. Domestically, conditions for growth are slowly improving with easing input cost pressures, supportive monetary conditions and recent measures relating to project approvals, land acquisition, mining, and infrastructure. Accordingly, the central estimate for real GDP growth in 2015-16 is expected to rise to 6.5 per cent with risks broadly balanced at this point (Chart 2). The revised GDP statistics (base 2011-12) released on January 30 along with advance estimates for 2014-15 expected on February 9, 2015 will need to be carefully analysed and could result in revisions to the Reserve Banks growth projections for 2015-16.

16. With liquidity conditions remaining comfortable, the recourse to export credit has been low less than 50 per cent of the limit on monthly average basis since October 2014. In pursuance of the Dr. Urjit R. Patel Committees recommendation to move away from sector-specific refinance, the ECR limit has been gradually lowered since June 2014. Continuing with this rationalisation, it has been decided to merge the facility with system level liquidity provision with effect from February 7, 2015. The Reserve Bank would continue to meet system wide liquidity needs as per the revised liquidity adjustment framework announced on August 22, 2014.

17. In order to create space for banks to expand credit, the SLR is being reduced from 22.0 per cent of NDTL to 21.5 per cent. Banks should use this headroom to increase their lending to productive sectors on competitive terms so as to support investment and growth.

I. Financial Markets

19. The Reserve Bank reduced the eligibility limit for foreign exchange remittances under the Liberalised Remittance Scheme (LRS) to USD 75,000 in 2013 as a macro-prudential measure. With stability in the foreign exchange market, this limit was enhanced to USD 125,000 in June 2014 without end-use restrictions, except for prohibited foreign exchange transactions such as margin trading, lotteries and the like. On a review of the external sector outlook and as a further exercise in macro prudential management, it has been decided to enhance the limit under the LRS to USD 250,000 per person per year. Furthermore, in order to ensure ease of transactions, it has also been decided in consultation with the Government that all the facilities for release of exchange/ remittances for current account transactions available to resident individuals under Schedule III to Foreign Exchange Management (Current Account Transactions) Rules 2000, as amended from time to time, shall also be subsumed under this limit.

20. With a view to meeting the emerging needs of foreign direct investment in various sectors with different financing needs and varying risk perceptions as also to offer the investor some protection against downside risks, it has been decided in consultation with the Government of India to introduce greater flexibility in the pricing of instruments/securities, including an assured return at an appropriate discount over the sovereign yield curve through an embedded optionality clause or in any other manner. Guidelines in this regard will be issued separately.

21. The investment limit in Government securities by foreign portfolio investors (FPIs), registered with the Securities and Exchange Board of India (SEBI) is currently capped at USD 30 billion of which USD 5 billion is reserved for long term investors. The limit on investment in Government securities is now fully utilised. As a measure to incentivise long term investors, it has been decided in consultation with Government to enable reinvestment of coupons in Government securities even when the existing limits are fully utilised.

22. FPIs are currently permitted to invest in Government securities with a minimum residual maturity of three years. No such condition has been stipulated for their investments in corporate bonds. To harmonize requirements, it is decided in consultation with Government that all future investment by FPIs in the debt market in India will be required to be made with a minimum residual maturity of three years. Accordingly, all future investments within the limit for investment in corporate bonds, including the limits vacated when the current investment by an FPI runs off either through sale or redemption, shall be required to be made in corporate bonds with a minimum residual maturity of three years. Furthermore, FPIs will not be allowed to invest incrementally in short maturity liquid/money market mutual fund schemes. There will, however, be no lock-in period and FPIs shall be free to sell the securities (including those that are presently held with less than three years residual maturity) to domestic investors. Detailed operational guidelines will be issued by end-February 2015.

23. In the first bi-monthly monetary policy statement for 2014-15, the Reserve Bank announced the implementation of the recommendations of the Committee on Financial Benchmarks (Chairman: Shri P. Vijaya Bhaskar). The Bank has issued guidelines on the governance framework for benchmark submitters on April 16, 2014. The Fixed Income Money Market Derivatives Association (FIMMDA) and Foreign Exchange Dealers Association of India (FEDAI) have since issued the Code of Conduct for benchmark submitters. An independent company named Financial Benchmarks India Pvt. Ltd, jointly floated by FIMMDA, FEDAI and Indian Banks Association (IBA) for administration of the rupee interest rate and foreign exchange benchmarks, has been incorporated. As a further step towards strengthening the benchmark-setting methodology, it has been decided to work out the necessary infrastructural and transitional arrangements for shifting the overnight MIBOR from the existing polling based system to transaction based system of the Clearing Corporation of India Ltd. (CCIL) by April 2015.

24. In order to develop the money and Government securities markets, cash settled 10-year interest rate futures (IRF) contracts were permitted to be introduced by stock exchanges in December 2013. A cash settled IRF contract on 10-Year Government of India (GoI) Security was launched in January 2014 and has received an encouraging response. In order to provide market participants with greater flexibility to hedge their interest rate risk, it has been decided to permit stock exchanges to introduce cash settled IRF contracts on 5-7-Year and 13-15 year Government of India Securities. Detailed operational guidelines will be issued by end-March 2015.

25. In June 2014, FPIs were permitted to participate in the exchange traded currency derivatives (ETCD) market. Simultaneously, the regulatory regime for participation of domestic entities in the ETCD market was modified with the objective of bringing about parity between the ETCD and over-the-counter (OTC) markets. With a view to providing greater flexibility to both FPIs and domestic participants in the ETCD market, it has been decided that:

domestic entities and FPIs will henceforth be allowed to take foreign currency positions in the USD-INR pair up to USD 15 million per exchange without having to establish the existence of any underlying exposure. In addition, they shall be allowed to take foreign currency positions in EUR-INR, GBP-INR and JPY-INR pairs, all put together up to USD 5 million equivalent per exchange, without having to establish the existence of any underlying exposure. Domestic entities and FPIs who want to take a position exceeding the above limits in the ETCD market will have to establish the existence of an underlying exposure.

for domestic participants who are importers of goods and services, the limit up to which they can take appropriate hedging positions in ETCD markets will be determined as 100 per cent of the higher of the (i) average of their last three years imports turnover or (ii) the previous years turnover, instead of 50 per cent at present.

Documentation and other administrative requirements for hedging on the ETCD markets are also being rationalised.

Detailed operational guidelines will be issued by end-March 2015.

II. Restructuring

26. At present, implementation of large projects is complex and unforeseen events may cause delays in project implementation, leading to failure in achieving the originally envisaged date of commencement of commercial operations (DCCO). The Reserve Bank has allowed vide circulars dated March 31, 2010 and May 30, 2013, certain flexibility with regard to loans to projects under implementation, wherein DCCO of the projects under implementation along with repayment schedules for such loans are allowed to be shifted to a certain extent without adversely affecting the asset classification of such loans. However, in the case of projects which have been stalled primarily due to inadequacies of the current promoters/management, a change in ownership and management may be required to revive the project. In this context, the new promoters/developers may require additional time to revive/complete the stalled projects. In order to facilitate change in ownership and revival, it has been decided to provide further flexibility by allowing a further extension of the DCCO of such projects where a change of ownership takes place, without adversely affecting the asset classification of loans to such projects, subject to certain conditions. Operating guidelines in this regard will be issued shortly.

27. According to Section 19(2) of the Banking Regulation Act 1949, banks are allowed to hold shares in a company, whether as pledgee, mortgagee or absolute owner, up to an amount not exceeding thirty per cent of the paid-up share capital of that company or thirty per cent of their own paid-up share capital and reserves, whichever is less. Banks can also acquire shares of a borrowing company by way of conversion of debt into equity, following prudential guidelines on restructuring of advances by banks and financial institutions, subject to conditions mentioned therein. However, the acquisition of shares of listed companies by conversion of debt or by any other means is required to conform to the Issue of Capital and Disclosure Requirements (ICDR) Regulations and the Substantial Acquisition of Shares and Takeovers (SAST) Regulations. Very often, the share prices of companies whose debt is being restructured, in accordance with the stipulations of ICDR Regulations are found to be not in consonance with their intrinsic value. This results in upfront allocation of disproportionate share of loss on restructuring to banks. In view of the above, the Reserve Bank is consulting with the SEBI for waiver, under certain specific circumstances, of the requirement of compliance with the ICDR and SAST Regulations, for conversion of debt into equity. Detailed guidelines will be issued within three months.

28. Under the Framework for Revitalising Distressed Assets in the economy, banks were allowed in February 2014 to reverse the excess provision on sale of non-performing assets (NPAs) to securitisation companies/reconstruction companies when the cash received (by way of initial sale consideration and/or redemption of security receipts/pass-through certificates) is higher than the net book value (NBV) of the asset, with a view to incentivising banks to recover appropriate value in respect of their NPAs, subject to certain conditions. This dispensation was, however, available on a prospective basis, i.e., only with regard to NPAs sold on or after February 26, 2014. On a review and based on banks representations in this regard, it has now been decided to extend the above dispensation to NPAs sold prior to February 26, 2014 also. Detailed guidelines to this effect will be issued shortly.

Fifth Bi-Monthly Monetary Policy Statement, 2014-15 By Dr. Raghuram G. Rajan, Governor, RBI - December 02, 2014

Monetary and Liquidity MeasuresOn 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 8.0 per cent;

keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liabilities (NDTL);

continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system through auctions; and

continue with daily one-day term repos and reverse repos to smooth liquidity.

Consequently, the reverse repo rate under the LAF will remain unchanged at 7.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 9.0 per cent.

Assessment of the Global Economy

2. Since the fourth bi-monthly monetary policy statement of September 2014, the global economy has slowed, though the recent sharp fall in crude prices will have a net positive impact on global growth. The recovery in the United States is broadening on the back of stronger domestic consumption, rising investment and industrial activity. In the Euro area, headwinds from recessionary forces continue to weaken industrial production and investment sentiment. In Japan, growth may be picking up again on the back of stronger exports, helped in part by further quantitative and qualitative easing that has led to a depreciation of the yen. In China, disappointing activity and still-low inflation have prompted rate cuts by the Peoples Bank of China. In other major emerging market economies (EMEs), downside risks to growth from elevated inflation, low commodity prices, deteriorating labour market conditions and stalling domestic demand have become accentuated.

3. Notwithstanding the cessation of asset purchases by the US Fed, financial markets have remained generally buoyant on abundant liquidity stemming from accommodative monetary policies in the advanced economies (AEs). The search for yield has driven global equity markets to new highs, with investors shunning gold and commodities. Capital flows to EMEs recovered from market turbulence in the first half of October, although some discrimination on the basis of fundamentals is becoming discernible.

Assessment of the Indian Economy

4. Domestic activity weakened in Q2 of 2014-15, and activity is likely to be muted in Q3 also because of a moderate kharif harvest. The deficiency in the north-east monsoon rainfall has constrained the pace of rabi sowing, except in the southern States. Despite reasonable levels of water storage in major reservoirs, the rabi crop is unlikely to compensate for the decline in kharif production earlier in the year and consequently, agricultural growth in 2014-15 is likely to be muted. This, along with a slowdown in rural wage growth, is weighing on rural consumption demand.

5. Despite the uptick in September, the growth of industrial production slumped to 1.1 per cent in Q2 with negative momentum in September, unable to sustain the improvement recorded in the preceding quarter. The persisting contraction in the production of both capital goods and consumer goods in Q2 reflected weak aggregate domestic demand. However, more recent readings of core sector activity, automobile sales and purchasing managers indices suggest improvement in likely activity. Exports have buffered the slowdown in industrial activity in Q2 but, going forward, require support from partner country growth.

6. In the services sector, the Octobers purchasing managers survey indicates deceleration in new business. In contrast, tourist arrivals and domestic and international cargo movements have shown improvement. Thus, various constituents of the services sector are emitting mixed signals.

7. A rise in investment is critical for a sustained pick-up in overall economic activity. While low capacity utilisation in some sectors is a dampener, the recent strong improvement in business confidence and in investment intentions should help. In this context, the still slow pace of reviving stalled projects, despite government efforts, warrants policy priority, even as ongoing efforts to ease stress in the financial system unlock resources for financing the envisaged investment push.

8. The fiscal outlook should brighten because of the fall in crude prices, but weak tax revenue growth and the slow pace of disinvestment suggest some uncertainty about the likely achievement of fiscal targets, and the quality of eventual fiscal adjustment. The government, however, appears determined to stay on course.

9. Retail inflation, as measured by the consumer price index (CPI), has decelerated sharply since the fourth bi-monthly statement of September. This reflects, to some extent, transitory factors such as favourable base effects and the usual softening of fruits and vegetable prices that occurs at this time of the year. On the other hand, protein-rich items such as milk and pulses continue to experience upside pressures, reflecting structural mismatches in supply and demand. The absence of adequate administered price revisions in inputs like electricity has contributed to the easing of inflation in the fuel group.

10. In the non-food non-fuel category, inflation eased broadly in September. Further softening of international crude prices in October eased price pressures in transport and communication. However, upside pressures persist in respect of prices of clothing and bedding, housing and other miscellaneous services, resulting in non-food non-fuel inflation for October remaining flat at its level in the previous month, and above headline inflation. Survey-based inflationary expectations have been coming down with the fall in prices of commonly-bought items such as vegetables, but are still in the low double digits. Administered price corrections, as and when they are effected, weaker-than-anticipated agricultural production, and a possible rise in energy prices on the back of geo-political risks could alter the currently benign inflation outlook significantly.

11. Liquidity conditions have eased considerably in Q3 of 2014-15 due to structural and frictional factors, as well as the fine tuning of the liquidity adjustment framework. With deposit mobilisation outpacing credit growth and currency demand remaining subdued in relation to past trends, banks are flush with funds, leading a number of banks to reduce deposit rates. The main frictional source of liquidity has been the large release of expenditure/transfers by the government. In view of abundant liquidity, banks recourse to the Reserve Bank for liquidity through net fixed and variable rate term and overnight repos and MSF declined from `803 billion, on average, in Q1 to `706 billion in Q2 and further to `476 billion in October-November. The use of export credit refinance also declined from 52.6 per cent of the limit in Q2 to 32.6 per cent in October-November. The revised liquidity management framework introduced in September, has helped the weighted average cut-off rates in the 14-day term repo auctions as well as in the overnight variable rate repo auctions to remain close to the repo rate, and the volatility of the weighted average call rate has fallen, apart from episodes of cash build-up ahead of Diwali holidays.

12. The Reserve Bank determines the need for open market operations (OMO) based on its assessment of monetary conditions rather than on a specific view on long term yields. On an assessment of the permanent liquidity conditions, the Reserve Bank conducted OMO sales worth `401 billion during October to December so far.

13. Merchandise exports declined in October, mainly reflecting sluggish external demand conditions, but also the softening of international prices resulting in lower realisations. For the period April-October as a whole, however, export growth remained positive although the deceleration since July requires vigilance. With import growth remaining modest on account of the decline in POL imports due to falling crude prices, the trade deficit narrowed from its level a year ago. Gold imports have surged since September in volume terms, largely reflecting seasonal demand. Barring month-to-month variations, non-oil non-gold import growth has remained moderate, with anecdotal evidence of imports substituting for shortfalls in domestic production. Even as external financing requirements stay moderate, all categories of capital flows, except non-resident deposits, have been buoyant. The consequent accretion to reserves denominated in US dollars has been moderated by valuation effects resulting from the strength of the US dollar.

Policy Stance and Rationale

14. Consistent with the balance of risks set out in the fourth bi-monthly monetary policy statement of September, headline inflation has been receding steadily and current readings are below the January 2015 target of 8 per cent as well as the January 2016 target of 6 per cent. The inflation reading for November which will become available by mid-December is expected to show a further softening. Thereafter, however, the favourable base effect that is driving down headline inflation will likely dissipate and inflation for December (data release in mid-January) may well rise above current levels.

15. The key uncertainty is the durability of this upturn. The full outcome of the north-east monsoon will determine the intensity of price pressures relating to cereals, oilseeds and pulses, but it is reasonable to expect some firming up of these prices in view of the monsoons performance so far and the shortfall estimated for kharif production. Risks from imported inflation appear to be retreating, given the softening of international commodity prices, especially crude, and reasonable stability in the foreign exchange market. Accordingly, the central forecast for CPI inflation is revised down to 6 per cent for March 2015 (Chart 1).

16. Turning to the outlook for inflation in the medium-term, projections at this stage will be contingent upon expectations of a normal south-west monsoon in 2015, international crude prices broadly around current levels and no change in administered prices in the fuel group, barring electricity. Over the next 12-month period, inflation is expected to retain some momentum and hover around 6 per cent, except for seasonal movements, as the disinflation momentum works through. Accordingly, the risks to the January 2016 target of 6 per cent appear evenly balanced under the current policy stance.

17. Some easing of monetary conditions has already taken place. The weighted average call rates as well as long term yields for government and high-quality corporate issuances have moderated substantially since end-August. However, these interest rate impulses have yet to be transmitted by banks into lower lending rates. Indeed, slow bank credit growth is mirrored by increasing reliance of large corporations on commercial paper and domestic as well as external public issuances.

18. Still weak demand and the rapid pace of recent disinflation are factors supporting monetary accommodation. However, the weak transmission by banks of the recent fall in money market rates into lending rates suggests monetary policy shifts will primarily have signaling effects for a while. Nevertheless, these signaling effects are likely to be large because the Reserve Bank has repeatedly indicated that once the monetary policy stance shifts, subsequent policy actions will be consistent with the changed stance. There is still some uncertainty about the evolution of base effects in inflation, the strength of the on-going disinflationary impulses, the pace of change of the publics inflationary expectations, as well as the success of the governments efforts to hit deficit targets.

A change in the monetary policy stance at the current juncture is premature. However, if the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle.

19. While activity appears to have lost some momentum in Q2, probably extending into Q3, conditions congenial for a turnaround the softening of inflation; easing of commodity prices and input costs; comfortable liquidity conditions; and rising business confidence as well as purchasing activity are gathering. These conditions could enable a pick-up in Q4 if coordinated policy efforts fructify in dispelling the drag on the economy emanating from structural constraints. A durable revival of investment demand continues to be held back by infrastructural constraints and lack of assured supply of key inputs, in particular coal, power, land and minerals. The success of ongoing government actions in these areas will be key to reviving growth and offsetting downside risks emanating from agriculture in view of weaker-than-expected rabi sowing and exports given the sluggishness in external demand. Anticipating such success, the central estimate of projected growth for 2014-15 has been retained at 5.5 per cent, with a gradual pick-up in momentum through 2015-16 on the assumption of a normal monsoon and no adverse supply/financial shocks

Fourth Bi-Monthly Monetary Policy Statement, 2014-15 By Dr. Raghuram G. Rajan, Governor, RBI - September 30, 2014 Part A: Monetary PolicyMonetary and Liquidity Measures

On the basis of an assessment of the current and evolving macroeconomic situation, it has been decided to:



reduce the liquidity provided under the export credit refinance (ECR) facility from 32 per cent of eligible export credit outstanding to 15 per cent with effect from October 10, 2014;

continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system through auctions; andcontinue with daily one-day term repos and reverse repos to smooth liquidity.


Assessment

2. Since the third bi-monthly monetary policy statement of August 2014, global activity has been recovering slowly from the setback in Q1 of 2014, on the back of strengthening consumer spending and gradually improving labour market conditions in advanced economies (AEs) like the United States. However, the Euro area, where growth has stalled in the core economies, continues to be weak. Major emerging market economies (EMEs) continue to struggle with tepid domestic demand and headwinds from structural impediments. With monetary policy in AEs remaining highly accommodative, investor risk appetite has increased and spread to various asset classes. With volatility perhaps excessively low, financial markets have risen to new highs, driving surges of capital flows to EMEs. Apart from concerns about a sudden correction in financial markets if investors misread the timing of a reversal of the US monetary policy stance or if geopolitical tensions intensify, some downside risks to growth also persist, such as a possible further slowdown in the Euro area.

3. Domestic activity appears to have come off somewhat after the stronger-than-expected upturn in Q1 of 2014-15. In Q2, the growth of industrial production slumped in July, as capital goods production followed consumer durables into contraction. Exports cushioned the fall in manufacturing output, with the Reserve Banks industrial outlook survey indicating expansion in export orders. Rainfall from the south west monsoon, now expected to be about 12 per cent deficient, will weigh on the kharif crop, mainly due to its uneven spatial distribution. This has resulted in drought-like conditions in some major production zones in the north-west region but also floods in the northern and eastern regions. In the services sector, constituents are moving at varying speeds and the purchasing managers index points to uncertainty around future prospects. The recent cautious optimism that is building in the economy on the back of improved business sentiment needs to be placed on solid foundations through a step-up in investment. In this context, the resumption of stalled projects should provide a boost to inventory and capex cycles, while reducing distressed bank loans and revitalising growth.

4. Retail inflation measured by the consumer price index (CPI) came off the vegetable prices-driven spike in July 2014 and eased in all major groups barring food. Large and persistent upside pressures on food prices have resulted in their contribution rising to almost 60 per cent of headline inflation in August. The full impact of the skewed rainfall distribution carries risks to the future path of food inflation, though vegetable prices have fallen recently after the recent spike. CPI inflation excluding food and fuel decelerated to its lowest level in the new series, mainly on account of sharp disinflation in transport and communication and household requisites. Future food prices and the timing and magnitude of held back administered price revisions impart some uncertainty to an otherwise improving inflation outlook, where lower oil prices, a relatively stable currency, and a negative output gap continue to put downward pressure. Base effects will also temper inflation in the next few months only to reverse towards the end of the year. The Reserve Bank will look through base effects.

5. Liquidity conditions have remained broadly balanced through Q2 of 2014-15, except for transient tightness in the second half of July and early August due to delayed Government expenditure. Thereafter, as these expenditures began to flow, liquidity conditions eased. With credit growth falling well below deposit growth in August and September, structural sources of liquidity pressures also eased. The average recourse to liquidity from the Reserve Bank, measured by daily net liquidity injection through LAF, term repo and MSF, decreased from `870 billion in July to `795 billion during August and further to `450 billion during September so far (up to September 28). The Reserve Bank revised its liquidity management framework with effect from September 5, 2014, with more frequent 14-day term repos and daily overnight variable rate repo operations, to ensure flexibility, transparency and predictability in liquidity management operations.

6. Non-food credit growth decelerated in September 2014, the lowest level since June 2001, despite liquidity conditions remaining comfortable and deposit growth remaining normal. Partly, this sharp deceleration is on account of a high base monetary tightening to curb the exchange market pressures in July-September last year raised interest rates on alternative sources of funds and pushed up the demand for credit from the banking system. Adjusting for these base effects, non-food credit growth would have been around 11 per cent in September 2014. Corporates have also opted to raise financing through alternative sources such as commercial paper, which are significantly larger than a year ago. Finance from other non-bank sources such as foreign direct investment and external commercial borrowing has also increased. Also, a few banks have sold stressed loans to asset reconstruction companies, and so these loans no longer appear as bank credit. Net bank credit is also lower because of repayments of loans by entities that have received payments by government departments and public enterprises, and because oil marketing companies borrowing is lower. Finally, the slowdown in credit growth is more pronounced in public sector banks, but how much of this is because of needed bank balance sheet restructuring, repayments of stressed loans, or increased risk aversion is to be established. Going forward, as the investment cycle gathers momentum and overall demand picks up, banks will need to prepare to meet financing requirements as the credit cycle also turns. Equally, given the easy availability of foreign finance, corporations should be wary of being lulled by relative exchange rate stability and neglect to hedge foreign exchange liabilities.

7. Incoming data suggest that the current account deficit, placed at 1.7 per cent of GDP for Q1 of 2014-15 may remain contained in Q2. Over April-August 2014, the trade deficit was narrower than a year ago, notwithstanding a slowdown in export growth in July and August and a strengthening of non-oil non-gold import growth to its highest level since March 2013. The improvement in the trade balance has benefited from the fall in the value of gold imports. Even as the external financing requirement stays moderate, all categories of capital flows remain buoyant. As a result, there has been an accretion to international reserves, even though reserves denominated in US dollars have moderated somewhat in recent weeks, largely because of the strength of the US dollar.

Policy Stance and Rationale8. 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 monsoons 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 Banks 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 Committees 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.

Third Bi-Monthly Monetary Policy Statement, 2014-15 By Dr. Raghuram G. Rajan, Governor, RBI - 5th August 2014Monetary and Liquidity MeasuresOn the basis of an assessment of the current and evolving macroeconomic situation, it has been decided to:



reduce the statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points from 22.5 per cent to 22.0 per cent of their NDTL with effect from the fortnight beginning August 9, 2014; and

continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL and liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system.


Assessment2. Since the second bi-monthly monetary policy statement of June 2014, global economic activity has been picking up at a modest space from a sharp slowdown in Q1. Investor risk appetite has buoyed financial markets, partly drawing strength from assurances of continuing monetary policy support in industrial countries. Portfolio flows to emerging market economies (EMEs) have risen strongly. This implies, however, that EMEs remain vulnerable to changes in investor risk appetite driven by any reassessment of the future path of US monetary policy or possible escalation of geopolitical tensions.

3. Sentiment on domestic economic activity appears to be reviving, with incoming data suggesting a firming up of industrial growth and exports. The June round of the Reserve Banks industrial outlook survey also points to improvement in business expectations in Q2. Leading indicators of the services sector are mixed, although there are early signs of modest strengthening of corporate sales and business flows. While the initial slow progress of the monsoon and its uneven spatial distribution raised serious concerns regarding agricultural production, these have been mitigated, though not entirely dispelled, by the pick-up in the monsoon through much of the country in July. The implementation of government policy actions that have been announced should create a congenial setting for a steady improvement in domestic demand and supply conditions.

4. Retail inflation measured by the consumer price index (CPI) has eased for the second consecutive month in June, with a broad-based moderation accompanied by deceleration in momentum. Higher prices of vegetables, fruits and protein-based food items were offset by the muted increase in the prices of non-food items, particularly those of household requisites and transport and communication. CPI inflation excluding food and fuel decelerated further, extending the decline that began in September 2013. However, with some continuing uncertainty about the path of the monsoon, it would be premature to conclude that future food inflation, and its spill-over to broader inflation, can be discounted.

5. Liquidity conditions have remained broadly stable, barring episodic tightness on account of movements in the cash balances of the Government maintained with the Reserve Bank. While the systems recourse to liquidity from the LAF, and regular and additional term repos has been around 1.0 per cent of the NDTL of banks, access to the MSF has been minimal and temporary. In order to manage transient liquidity pressures associated with tax outflows and sluggish spending by the Government, the Reserve Bank injected additional liquidity aggregating over ` 940 billion through nine special term repos of varying maturities during the months of June and July. Despite the reduction in the export credit refinance effected in early June, average utilisation of the facility has only been around 70 per cent of the available limit. The Reserve Bank will review existing liquidity arrangements and continue to monitor and manage liquidity to ensure adequate flow of credit to the productive sectors.

6. With the buoyancy in export performance sustained through Q1, the trade deficit has narrowed from its level a year ago. While oil imports rose in June partly on higher international crude prices, gold import growth picked up in response to some liberalization of import restrictions, and non-oil non-gold import growth has turned positive since May. Turning to external financing, all categories of capital flows have been buoyant. Surges in capital inflows in excess of the current account financing requirement and the repayment of swaps by oil marketing companies have bolstered international reserves.

Policy Stance and Rationale7. The moderation in CPI headline inflation for two consecutive months, despite the seasonal firming up of prices of fruits and vegetables since March, is due to both base effects and the steady deceleration in CPI inflation excluding food and fuel. The recent fall in international crude prices, the benign outlook on global non-oil commodity prices and still-subdued corporate pricing power should all support continued disinflation, as should measures undertaken to improve food management. There are, however, upside risks also, in the form of the pass-through of administered price increases, continuing uncertainty over monsoon conditions and their impact on food production, possibly higher oil prices stemming from geo-political concerns and exchange rate movement, and strengthening growth in the face of continuing supply constraints. Accordingly, the upside risks to the target of ensuring CPI inflation at or below 8 per cent by January 2015 remain, although overall risks are more balanced than in June . It is, therefore, appropriate to continue maintaining a vigilant monetary policy stance as in June, while leaving the policy rate unchanged.

8. Prospects for reinvigoration of growth have improved modestly. The firming up of export growth should support manufacturing and service sector activity. If the recent pick-up in industrial activity is sustained in an environment conducive to the revival of investment and unlocking of stalled projects, with ongoing fiscal consolidation releasing resources for private enterprise, external demand picking up and international crude prices stabilising, the central estimate of real GDP growth of 5.5 per cent within a likely range of 5 to 6 per cent that was set out in the April projection for 2014-15 can be sustained. On the other hand, if risks relating to the global recovery, the monsoon and geo-political tensions intensify, the balance of risks could tilt to the downside.

9. The Reserve Bank will continue to monitor inflation developments closely, and remains committed to the disinflationary path of taking CPI inflation to 8 per cent by January 2015 and 6 per cent by January 2016. While inflation at around 8 per cent in early 2015 seems likely, it is critical that the disinflationary process is sustained over the medium-term. The balance of risks around the medium-term inflation path, and especially the target of 6 per cent by January 2016, are still to the upside, warranting a heightened state of policy preparedness to contain these risks if they materialise. In the months ahead, government actions on food management and to facilitate project completion should improve supply, but as consumer and business confidence pick up, aggregate demand will also strengthen. The Reserve Bank will act as necessary to ensure sustained disinflation.

10. In the second bi-monthly monetary policy statement of June 2014, the Reserve Bank reduced the SLR to 22.5 per cent of NDTL in anticipation of recovery in economic activity. With the Union Budget for 2014-15 renewing commitment to the medium-term fiscal consolidation roadmap and budgeting 4.1 per cent of GDP as the fiscal deficit for the year, space has opened up further for banks to expand credit to the productive sectors in response to its financing needs as growth picks up. Accordingly, the SLR is reduced by a further 0.5 per cent of NDTL.

11. In consonance with the calibrated reduction in the SLR, it is necessary to enhance liquidity in the money and debt markets so that financial intermediation expands apace with a growing economy. Currently, banks are permitted to exceed the limit of 25 per cent of total investments under the held to maturity (HTM) category provided the excess comprises only SLR securities, and banks total holdings of SLR securities in the HTM category is not more than 24.5 per cent of their NDTL as on the last Friday of the second preceding fortnight. In order to enable banks greater participation in financial markets, this ceiling is being brought down to 24 per cent of NDTL with effect from the fortnight beginning August 9, 2014.

12. The Reserve Bank has taken a number of steps to enhance efficiency, increase entry, speed up resolution, and improve access to financial services, such as modified regulations on long term lending and borrowing, proposals for licensing payment banks and small banks, a framework to deal with stressed assets, actions to further the use of mobile phones in banking, and efforts to simplify know your customer (KYC) norms, among others. The Reserve Bank will continue to carry forward its banking sector reforms agenda.

Second Bi-monthly Monetary Policy Statement, 2014-15 By Dr. Raghuram G. Rajan, Governor, RBI - 3rd June 2014Monetary and Liquidity MeasuresOn 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 8.0 per cent;

keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liabilities (NDTL);reduce the statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points from 23.0 per cent to 22.5 per cent of their NDTL with effect from the fortnight beginning June 14, 2014;

reduce the liquidity provided under the export credit refinance (ECR) facility from 50 per cent of eligible export credit outstanding to 32 per cent with immediate effect;

introduce a special term repo facility of 0.25 per cent of NDTL to compensate fully for the reduction in access to liquidity under the ECR with immediate effect; and

continue to provide liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system.


Assessment

Monetary Policy - Assessment Since the first bi-monthly monetary policy statement of April 2014, global activity is evolving at different speeds. A broad-based strengthening of growth is gaining traction in the US and the UK, after a moderation in the first quarter of 2014 due to adverse weather conditions.

Policy Stance and RationaleIn March and April, CPI headline inflation has risen on the back of a sharp increase in food prices. Some of this price pressure will continue into May, but it is largely seasonal. Moreover, CPI inflation excluding food and fuel has been edging down. The risks to the central forecast of 8 per cent CPI inflation by January 2015 remain broadly balanced.

First Bi-monthly Monetary Policy Statement, 2014-15 By Dr. Raghuram G. Rajan, Governor, RBI - 1st April 2014Part 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:keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0 per cent;

keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liability (NDTL); and

increase the liquidity provided under 7-day and 14-day term repos from 0.5 per cent of NDTL of the banking system to 0.75 per cent, and decrease the liquidity provided under overnight repos under the LAF from 0.5 per cent of bank-wise NDTL to 0.25 per cent with immediate effect.


Assessment

Since the Third Quarter Review of January 2014, global activity appears to have moderated on slower growth in the US, the UK and Japan, continuing sluggishness in the Euro area and a subdued pick-up in emerging and developing economies, restrained by the uncertain external demand environment as well as by localised cyclical and structural constraints. For a number of emerging markets, further tightening of external financing conditions and renewed volatility of capital flows are the biggest risks to their outlook. Going forward, global growth is likely to strengthen in the rest of the year, with risks tilted to the downside.

Policy Stance and RationaleSince December 2013, the sharper than expected disinflation in vegetable prices has enabled a sizable fall in headline inflation. Looking ahead, vegetable prices have entered their seasonal trough and further softening is unlikely. Meanwhile, CPI inflation excluding food and fuel has remained flat.

Part B: Developmental and Regulatory PoliciesThis part of the Statement reviews the progress on various developmental and regulatory policy measures announced by the Reserve Bank in recent policy statements and also sets out new measures.

In the Second Quarter Review of Monetary Policy 2013-14 announced in October 2013, the Reserve Bank set out a five-pillar framework to guide its developmental and regulatory measures. Noteworthy progress has since been made in implementing measures within this framework.

CHAPTER NO: 3CONCLUSION

CHAPTER NO: 4APPENDIX

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