India's central bank maintained its benchmark repurchase rate at 8.0 percent, but held out the promise of a rate cut early next year if the current trend of declining inflation continues.
The Reserve Bank of India (RBI), which has been under pressure to unwind its 75 basis points rate rise from September 2013 to January 2014, said "a change in the monetary policy stance at the current juncture is premature," in light of uncertainty of the base effects on inflation, the strength of disinflationary impulses, the change in inflation expectations and the government's success in meeting its deficit targets.
"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," RBI Governor Raghuram Rajan said in a statement.
India's consumer price inflation rate eased to 5.52 percent in October from 6.46 percent, continuing the declining trend since November 2013 when it spiked at 11.16 percent.
Inflation has now fallen below the RBI's target of 8.0 percent by January 2015 as well as the 6.0 percent target for January 2016, and Rajan said November inflation is expected to fall further.
However, Rajan underscored that the current favorable base effect that is driving down inflation will likely dissipate and December inflation could rise above the current level so the key uncertainty facing the RBI in setting its future policy is how long this expected rise in inflation persists.
Over the next 12 months inflation is expected to hover around 6 percent, apart from seasonal movements, which means the RBI's inflation target for January 2016 is evenly balanced.
India's economy slowed slightly in the second and third quarters, but Rajan said there were improving conditions - such as softer inflation, lower commodity prices, comfortable liquidity and rising business confidence - for a turnaround.
The RBI's central estimate for projected growth of 5.5 percent in financial year 2014/15, which began on April 1, was maintained, with a gradual pick-up in momentum through 2015-16.
India's Gross Domestic Product expanded by an annual rate of 5.3 percent in the third calendar quarter, down from 5.7 percent in the second quarter but up from 4.6 percent in the first quarter.
The Reserve Bank of India issued the following statement by its governor, Raghuram Rajan: (charts not included)
"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 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 People’s 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 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.
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 monsoon’s 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 public’s inflationary expectations, as well as the success of the government’s 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 (Chart 2).
20. The sixth bi-monthly monetary policy statement is scheduled on Tuesday, February 3, 2015.
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NEW DELHI: Reserve Bank may keep policy rate unchanged in its upcoming monetary policy review on Tuesday even as the Finance Minister and industry clamoured for the rate cut to prop the economy after GDP growth slipped to 5.3 per cent in the second quarter of current fiscal.
At the same time, inflation has hit multi-year low making a case for the rate cut.
"The fact of matter is that all the parameters are indicating that there will be further fall in inflation. Between November and January with the base effect it might go up a little bit. But by March it will be well below whatever the glide path that is indicated by the RBI," SBI Chairperson Arundhati Bhattacharya said.
"RBI Governor has indicated that he will be data driven ... may be by the end of the fiscal (cut in the interest rate by RBI)," she added.
Asked if she expected a rate cut in RBI's bi-monthly policy on December 2, she said, "No".
United Bank of India Executive Director Deepak Narang said that RBI would wait for some more time before effecting rate cut to prop up growth.
"Although parameters are conducive for the rate cut but there is hardly any appetite for loan in the market. Rate reduction by 0.25 per cent is not going to generate significant demand in the market," he said.
"Therefore, I think the RBI Governor would maintain status on December 2," he said.
The Reserve Bank, which has been keeping rates at an elevated level citing high inflation, wants the rate of price rise to come down to 6 per cent by January 2016.
Poor showing by agriculture and manufacturing sector pulled down the country's economic growth rate to 5.3 per cent in the second quarter against 5.7 per cent in the April-June quarter of this year.
Inflation based on the Wholesale Price Index cooled to a 5-year low of 1.77 per cent in October driven by softening prices of fuel and food items. At the same time, retail inflation, based on Consumer Price Index, also eased to 5.52 per cent at end of October.
Finance Minister Arun Jaitley has also pitched for a cut in interest rate saying it will have positive impact on home and auto loans.
In in interview to PTI last week, Jaitley had expressed hope that RBI will move in the direction of making the cost of capital reasonable to help perk up economy.
On the other hand, Yes Bank CEO and Managing Director Rana Kapoor expects that the central bank may cut interest rate by 0.25 per cen
NEW DELHI—India’s economic growth decelerated in the third quarter, feeding doubts about how quickly the country’s new government can deliver on pledges to end a nearly three-year slump and transform the world’s second-most-populous nation into a manufacturing powerhouse.
Gross domestic product grew 5.3% from a year earlier for the three months that ended Sept. 30, according to government data released Friday. Manufacturing, which accounts for 15% of the economy, was stagnant, expanding just 0.1%. Financial and business services strengthened.
Shilan Shah, an economist at London-based Capital Economics, said growth for the quarter “is still very lackluster by past standards—and in terms of what India can achieve at the moment.”
The latest figures marked a retreat from the 5.7% year-over-year growth posted in the previous quarter. Growth was modestly above the median forecast of 5.1% in a poll of 16 economists by The Wall Street Journal. In each of the last two fiscal years, Indian growth has come in below 5%, the slowest such spell in decades.
“By and large, the trend is generally upwards,” said Siddhartha Sanyal, a Barclays Capital economist. “But within the quarterly numbers, there might be some ups and downs.”
Starting in 2003, India’s economy grew 8% a year on average for nearly a decade, lifting millions out of poverty and creating a generation of young people with middle-class aspirations. The abrupt end of those halcyon years stirred voters’ perceptions that India’s previous government was ineffectual and corrupt, helping to vault Prime Minister Narendra Modi into office this spring.
Half a year later, hopes for a turnaround in Asia’s third-largest economy are running high.
Amid torpid growth in other large developing countries—and in Europe and Japan—India’s promise has set it apart. Foreign investors are pouring money into Indian stocks and bonds. On Friday, the total market capitalization of companies listed on Mumbai’s BSE stock exchange passed 100 trillion rupees ($1.6 trillion) for the first time.
But a series of largely incremental steps by Mr. Modi has yet to cause the Indian economy to achieve liftoff.
The second quarter’s jump was “an aberration,” said Glenn Levine, senior economist at Moody’s Analytics. Exports and fixed investment, both growing from a low base a year earlier, had propelled the April-through-June uptick. “Neither of those looks sustainable,” Mr. Levine said.
One centerpiece of the prime minister’s economic program is a “Make in India” campaign, which aims to position the country as a new hub for labor-intensive manufacturing as wages in China rise and India’s workforce swells.
To that end, the Modi administration has raised ceilings on foreign investment in defense and railway construction. It has worked to approve stalled investment projects, reduce red tape for small firms and simplify bureaucratic procedures in other ways.
“These are minor changes with major impacts,” said Karan A. Chanana, chief executive of Amira Nature Foods Ltd. , a producer and exporter of specialty Indian rice. The new government has “provided all the cues for growth.”
But more-radical overhauls will take time to implement. A plan to streamline the sales-tax system, which the World Bank has called “the most crucial reform that could improve competitiveness of India’s manufacturing sector,” faces technological hurdles and resistance from state governments.
Labor unions and their political allies will fight any attempt to relinquish the government’s monopoly on commercial coal production, an operation at the heart of powering the economy.
In an interview with the Press Trust of India published this week, Finance Minister Arun Jaitley said the government will liberalize additional sectors of the economy next year. He said modernizing infrastructure will be a focus, as will increasing access to capital. Bank-credit growth hit a multiyear low in September.
But, Mr. Jaitley cautioned: “It will still take some time before results start surfacing. On the ground some green shoots are visible.”
India is on firmer footing than it was last year, when news of possible tightening in U.S. monetary policy roiled Indian markets and triggered massive capital flight.
Since then, inflation has halved, thanks largely to plummeting world oil prices. Restrictions on gold imports have cut India’s trade imbalance sharply, though late Friday, the Indian central bank withdrew its gold-import curbs. Net inflows of foreign direct investment between April and August were up a third from a year earlier.
sive - RBI under pressure to cut rates as growth slips
BY MANOJ KUMAR
NEW DELHI Tue Nov 25,(Reuters) - India's economic growth probably slowed to around 5 percent in the three months to September, slipping from 5.7 percent in the previous quarter, two senior finance ministry sources said, putting pressure on the central bank to cut interest rates.
The sources said Finance Minister Arun Jaitley would press Reserve Bank of India (RBI) Governor Raghuram Rajan to lower borrowing costs when the two meet ahead of a decision on interest rates next Tuesday.
Six months after Prime Minister Narendra Modi swept to power with a promise that "better days are coming", growth of 5 percent would mark a serious setback from the previous quarter and fall far short of the 8 percent that Asia's third-largest economy needs to create enough jobs for its growing workforce.
Official GDP figures are due for release on Friday.
Indian finance ministers often "jawbone" the RBI on interest rates, but Jaitley's calls have become unusually insistent of late. Aides say he will make the case for cuts forcefully.
"When Rajan meets the finance minister ahead of the policy review, he would be urged to cut the interest rates," one senior finance ministry official with direct knowledge of the matter told Reuters. "A rate cut is the only hope for industry facing poor domestic and external demand."
HISTORY OF INFLATION
Rajan, who made no reference to policy rates at a speaking engagement on Tuesday in Gujarat, has resisted calls to cut the RBI's 8 percent repo rate, even though consumer inflation has dipped below the 6 percent target he wants to hit by January 2016.
The closest Rajan got to addressing the issue was in an answer to a question on the steep cost of borrowing to households, which he said was the result of India’s history of high inflation.
The hawkish former IMF chief economist has made it his mission to introduce inflation targeting to India, a country long plagued by double-digit price rises that hurt the more than 700 million people who live on $2 a day or less.
While factors such as weak international oil prices and flagging export demand have prompted Asia's top two economies, China and Japan, to take aggressive action to ease monetary policy, Rajan has held out.
Bonds have rallied on hopes that falling inflation would lead the RBI to cut rates earlier than expected, but they took a breather on Tuesday. The benchmark 10-year Indian government bond closed flat to yield 8.16 percent, down 30 basis points since the RBI policy meeting in October.
"There is no doubt that we are on the threshold of a change in interest rates," said Nirav Dalal, group president and senior managing director of financial markets at Yes Bank. "It is a matter of time now."
INFLATION TARGET
Policy makers in New Delhi say the RBI should follow its Asian counterparts, ratcheting up the pressure on a central bank that enjoys policy autonomy but lacks the kind of independence enjoyed by central banks in the West.
"Rajan would have to really work hard to convince the Finance Minister why he will not cut interest rates this time," said another finance ministry official who is responsible for tax policy.
After two years of sub-5 percent growth, India's $2 trillion economy is struggling to break consistently above that level, which means the tax take for the year to end-March is now set to miss budget by as much as 900 billion rupees ($15 billion), the second official estimated.
Jaitley has so far vowed to uphold a fiscal deficit target of 4.1 percent of GDP, but his aides caution that any further cuts in spending that the government has to make to hit it could further sap growth.
"Expenditure cuts are certain, and that means a further slowdown in the economy," the official said.
PUSHING ON STRING
Independent economists caution, however, that cuts in interest rates may not be the best medicine for India, which is in desperate need of structural reforms to make it easier to do business.
"Easing monetary policy without enacting far-reaching structural reforms that raise productivity would only risk re-igniting price pressures when things turn up, leaving everyone worse off," Frederic Neumann at HSBC wrote in a commentary.
Red tape has strangled investment, and with it demand for credit. At the same time a state-dominated banking system riddled with bad loans may put an investment recovery at risk, the OECD said last week.
"A rate cut will have a sentiment boost impact for consumers but then that sentiment boost won't last long as the supply side is constrained," said Indranil Pan, chief economist at Kotak Mahindra Bank.
"The fall in inflation is not a structural correction but a cyclical correction because oil, commodity prices are not in our hands and they can turn anytime."
head of the monetary policy review, SBI Chairperson Arundhati Bhattacharya on Thursday said RBI may leave interest rate unchanged in the next review but could soften its stance by end of the current fiscal.
“The fact of matter is that all the parameters are indicating that there will be further fall in inflation.
Between November and January with the base effect it might go up a little bit. But by March it will be well below whatever the glide path that is indicated by the RBI,” she said.
“RBI Governor has indicated that he will be data driven...may be by the end of the fiscal (cut in the interest rate by RBI),” she added.
Asked if she expected rate cut from RBI next month, she said “no”.
“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,” Governor Raghuram Rajan had said in his monetary policy announcement on September 30.
The RBI, which has been keeping rates at an elevated level citing high inflation, wants it to come down to 6 per cent by January 2016. It is scheduled to come out with its bi-monthly policy announcement on December 2.
Inflation based on the Wholesale Price Index cooled to a 5-year low of 1.77 per cent in October driven by softening prices of fuel and food items. At the same time, retail inflation, based on Consumer Price Index, also eased to 5.52 per cent at end of October.
With moderation in inflation, there is a widespread expectation that RBI will cut interest rate in its upcoming bi-monthly monetary policy.
e, Central Bank Adviser Says
By Subhadip Sircar <span class="divider" style="background-color: #d6d6d6; background-position: initial initial; background-repeat: initial initial; box-sizing: border-box; display: inline-block; height