On the basis of an assessment of the current and evolving macroeconomic situation, RBI has increased the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points, from 7.75 per cent to 8.0 per cent, in its Q3 review of monetary policy announced on January 28. Consequently, the reverse repo rate under the LAF stands adjusted at 7.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 9.0 per cent.
Cash reserve ratio (CRR) of scheduled banks remains unchanged at 4.0 per cent of net demand and time liability (NDTL).
Prospects of a pick-up in real GDP growth in the second half of 2013-14 have been dampened by negative growth in industrial production over two consecutive months, sluggishness in services sector activity, and weakening in private consumption and investment demand. Notwithstanding improved export performance and buoyant outlook for agricultural production, GDP growth for the current fiscal could be “somewhat” lower than the central estimate of 5 per cent projected at the time of the Q2 Policy Review.
While retail inflation measured by the consumer price index (CPI), the new focus in the apex bank’s inflation targeting and perceived to be a grave downward risk to growth and rupee value, has declined significantly on account of disinflation in vegetable and fruit prices, it remains elevated at close to double digits. The baseline CPI inflation projections indicate that over the ensuing 12-month period, there are upside risks to the central forecast of 8 per cent, factoring an unchanged policy stance. The extent and direction of policy steps in future will be data dependent, though, if the disinflationary process evolves according to this baseline projection, further policy tightening in the near term is not anticipated at this juncture.
If policy actions succeed in delivering the desired inflation outcome, the current year’s real GDP growth placed at somewhat lower than the central estimate of 5 per cent would likely firm up to a range of 5 to 6 per cent in 2014-15, with risks balanced around the central estimate of 5.5 per cent. A pick-up in investment, subdued inflation and supportive external demand could lift the growth into the higher reaches of this forecast range, the apex bank says.
