RBI's First Quarter Review of Monetary Policy 2013-14

In its first quarter monetary policy review for FY14 held on July 31st 2013, the Reserve Bank of India (RBI), India’s central bank, decided to leave the policy repo rate unchanged at 7.25 %. The cash reserve ratio (CRR) of scheduled banks was left unchanged at 4.0% of net demand and time liabilities (NDTL).

Projections:

• GDP Growth:5.5% from 5.7%
• Inflation: 5.5%
• M3 Growth (Velocity of Money): Retained at 13%
• Deposit Growth: Retained at 14%
• Credit Growth: Projected growth at 15%

Monetary Policy Stance:

• To address the risks to macroeconomic stability from external shocks;
• To continue to address the heightened risks to growth;
• To guard against re-emergence of inflation pressures; and
• To manage liquidity conditions to ensure adequate credit flow to the productive sectors of the economy.

Guidance:

The policy stance in this review is guided by the need for continuous vigil and preparedness to pro-actively respond to risks to the economy from external developments, especially those stemming from global financial markets, while managing the trade-off posed by increased downside risks to growth

The recent liquidity tightening measures by the Reserve Bank are aimed at checking undue volatility in the foreign exchange market and will be rolled back in a calibrated manner as stability is restored to the foreign exchange market, enabling monetary policy to revert to supporting growth with continuing vigil on inflation

The RBI stands ready to use all available instruments to respond swiftly to any adverse development.

The priority of the RBI in this policy review, like the last one, was to address risks to macro-economic stability from external shocks. Though it noted that inflation has moderated and growth remains weak, the sharp depreciation in the rupee due to capital outflows and uncertainty in the global environment remains a pressing concern.


Risk factors:

The following have been cited as risks to RBI’s macro-economic outlook

The Current Account Deficit (CAD) is currently well above the sustainable level of 2.5% of GDP for three years in a row. For 2012-13, the CAD was 4.8% of GDP, RBI believes that any future announcements of qualitative easing (QE) tapering increases the possibility of further capital outflows. As a result, financing of the CAD becomes a serious macro-economic risk.

Weak investment climate: Business sentiment and investor confidence remain subdued. Moreover, policy bottlenecks continue to stall investment plans, bringing growth under pressure.

Inflationary risks: Supply constraints, particularly in the food and infrastructure sectors continue to pose inflation pressure. The upward push from "imported" inflation due to rupee depreciation and the hike in administered prices could pose risks in coming months.