RBI focussed on keeping the economy on a disinflationary glide path

India Infoline News Service | Mumbai |

If inflation continues along the intended glide path, further policy tightening in the near term is not anticipated at this juncture.

The Reserve Bank’s policy stance will be firmly focussed on keeping the economy on a disinflationary glide path that is intended to hit 8% CPI inflation by January 2015 and 6% by January 2016. At the current juncture, it is appropriate to hold the policy rate, while allowing the rate increases undertaken during September 2013-January 2014 to work their way through the economy. Furthermore, if inflation continues along the intended glide path, further policy tightening in the near term is not anticipated at this juncture.

Contingent upon the desired inflation outcome, real GDP growth is projected to pick up from a little below 5% in 2013-14 to a range of 5 to 6% in 2014-15 albeit with downside risks to the central estimate of 5.5%. Lead indicators do not point to any sustained revival in industry and services as yet, and the outlook for the agricultural sector is contingent upon the timely arrival and spread of the monsoon. Easing of domestic supply bottlenecks and progress on the implementation of stalled projects already cleared should brighten up the growth outlook, as would stronger anticipated export growth as the world economy picks up.

In pursuance of the Dr. Urjit R. Patel Committee’s recommendation to de-emphasise overnight “guaranteed-access” windows for liquidity management and progressively conduct liquidity management through term repos, the Reserve Bank has decided to further reduce access to overnight repos under the LAF while compensating fully with a commensurate expansion of the market’s access to term repos from the Reserve Bank. The primary objective is to improve the transmission of policy impulses across the interest rate spectrum.  The term repo has evolved as a useful indicator of underlying liquidity conditions. It also allows market participants to hold liquidity for a longer period, thereby providing the impetus for engaging in term transactions in the market, evolving market-based benchmarks for pricing various financial products and also improving efficiency in cash/treasury management.

Liquidity conditions have tightened in March, partly on account of year-end ‘window dressing’ by banks, though an extraordinary infusion of liquidity by the Reserve Bank has mitigated the tightness. The Reserve Bank will propose measures to reduce such practices.

 

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