RBI’s Credit Policy Statement: Overview

RBI’s Credit Policy Statement: Overview

Question: RBI recently released the credit policy statement for the second quarter. Provide an overview of this.

• RBI has reduced repo rate by 25 basis points while keeping the CRR and SLR unchanged

• Credit policy statement notes that macroeconomic conditions in margining markets remain fragile due to domestic factors and bouts of financial market turbulence

• International financial markets have also been volatile on account of changing perceptions of monetary policies in advanced economies

• Domestic economic activity maintained a moderate level in Q1 of the current fiscal

• Estimated 94 lakh ha of area sown under rabi crop was negatively affected by unseasonal rains and hailstorms during the month of March

• Outlook for the Kharif season has been negative with IMD predicting a below average monsoon
and confirmation of El Nino onset by Australia’s weather department

• Damage to crops such as pulses and oilseeds pose an upside risk to food inflation

• The contingency plan for the government’s food management is crucial to limit low impact production on inflation

• Increase in agricultural support prices must be limited, as per the statement

• The credit policy statement has also noted that industrial production is recovering at an uneven pace and sustained weakness in consumption spending, more so in rural areas is a major obstacle

• There has been contraction in corporate sales

• Upturn in capital goods production is on its way through revival of stalled investment projects, fresh cape through private firms critical for sustaining the trends

• Statement holds that sustained revival of coal output will work out well for energy generation and mining

• Optimism has grown regarding gas pricing and availability

• Power purchase processed must be expedited and power distribution firms’ financial stress must be met on priority basis
• Statement holds that certain PSU banks will require more capital to clean up their balance sheets and support lending following revival of investment

• Leading indicators of services sector are emitting mixed signals as slowdown in tourism growth, railway traffic and global air passenger and freight traffic could impact hospitality and transport firms

• Statement has noted that vegetables inflation continues to lessen as does that of cereals, sugar, spices and oil

• Prices of protein items, including milk and pulses continue to hike

• Rural wage growth, though currently moderate has picked up

• Inflation expectations remain in high single digits; current account deficit has been confined to 1.5 percent of the GDP this year

• Net exports continue to contribute towards growth; growth is more reliant on strengthening of domestic demand

• Forex reserves are around USD 350 billion providing a second line of action in addition to sound macroeconomic policies in case there is volatility in external markets

• Inflation continues to be pulled down by base effects till August on the basis of assumption of reasonable food management but it will start to rise to 6 percent b January 2016

• Risks to inflation are posed by the following:
- Weak monsoon
- Growing crude prices
- Volatility in international environment

Facts and Stats

• Cash reserve ratio or share of deposits banks must place with the RBI was kept constant at 4 percent

• SLR or lenders investment in g-secs has also been left unchanged at 21.5 percent

• Consumer price index inflation target for January 2016 rose to 6 percent

• Lowered GDP growth is projected from 7.8 to 7.6 percent for FY2016.