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RBI Guv Rajan keeps policy repo rate & CRR unchanged

02 Dec '14
9 min read


This, along with a slowdown in rural wage growth, is weighing on rural consumption demand.

Despite the uptick in September, the growth of industrial production slumped to 1.1 per cent in the second quarter 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 the second quarter 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 the second quarter, but, going forward, requires support from partner country growth.

In the services sector, the October’s 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.

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.

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.

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.

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.

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