RBI Guv Rajan keeps policy repo rate & CRR unchanged

02 Dec '14

9 min read

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.

Liquidity conditions have eased considerably in the third quarter 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 Rs 803 billion, on average, in the first quarter to Rs 706 billion in the second quarter and further to Rs 476 billion in October-November.

The use of export credit refinance also declined from 52.6 per cent of the limit in the second quarter 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.

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 Rs 401 billion during October to December so far.

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.

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