Food Inflation Calling: RBI Releases Monetary Policy

Food Inflation Calling: RBI Releases Monetary Policy

The third bi-monthly monetary policy has been released by the RBI. Here are some of its most important features. The RBI has aimed to keep the policy repo rate under the liquidity adjustment facility unchanged at 8.0% and this is in view of the current and dynamically changing macroeconomic situation. The cash reserve ratio of scheduled banks remained unchanged at 4.0% of NDTL (Net demand and time liabilities).

It has also been decided to reduce the SLR (statutory liquidity ratio) of scheduled commercial banks by around 50 basis points from 22.5 to 22.0 % of the NDTL with effect from the fortnight commencing August 9 this year.

The aim is also to continue to provide liquidity under overnight repos at 0.25% of bank wise NDTL and liquidity of around 0.75% of the NDTL of the banking system as per the liquidity under the 7-day and 14-day term repos. The reverse repo rate under the LAF will remain at 7.0% whereas marginal standing facility and Bank rate will remain at 9.0%. Since the second bi-monthly monetary policy statement issued in June 2014, global economic activities have picked up at a modest pace from a massive slowdown in the first quarter.

Investor risk appetite has boosted the financial markets and portfolio flows to emerging market economies have increased considerably. Domestic economic activity is seeming to revive as industrial growth and exports reach better levels. RBI has indicated that there has been an increase in the improvement of business expectations in the second quarter. Modest strengthening of corporate sales and business flows are indicative of an economy that can prosper from improvement in domestic demand and supply conditions.

Retail inflation as measured by the consumer price index eased for the second consecutive month in June. Non-food items were less costly than vegetables, fruits and protein based foods. Household requisites and transport as well as communication became cheaper and CPI inflation excluding food and fuel decelerated further. The decline began in the month of September 2013 though the RBI report clearly indicates this does not discount chances of future inflation in food prices resulting in a spill-over effect to broader inflation.

Liquidity conditions have retained their stability though there has been episodic tightness on the basis of movements in government cash balances maintained with the RBI. RBI has aimed to manage liquidity pressures associated with tax outflows and a fall in the spending of the government though aggregation of over 940 billion through 9 special term repos of varying maturities in the months of June and July. The RBI will also conduct a review of existing liquidity arrangements and continue to manage as well as monitor the liquidity.

The central bank has also aimed to improve efficiency as well as increase entry. The aim is to speed up resolution and ensure improved access to financial services. The RBI will also continue to carry forward the banking sector reforms agenda as well. The fourth bi-monthly monetary policy statement is to be released on September 30 in this year. Food inflation continues to haunt the Indian consumer and conditions being what they are, a lot of effort will need to be made to lay this particular ghost to rest.