Tuesday, September 30, 2014

India holds rate, upside risks to inflation ease slightly

    India's central bank maintained its benchmark repo rate at 8.0 percent, as widely expected, but struck a slightly dovish tone by saying the balance of risks to inflation meeting the bank's target were somewhat lower than in early August though they still remain to the upside.
    The Reserve Bank of India (RBI), which raised its repo rate by 75 basis points from September 2013 to January 2014, said the continuing risks around inflation "warrant policy preparedness to contain pressure if the risks materialize" so the "future policy stance will be influenced by the Reserve Bank's projections of inflation relative to the medium term objective."
    At its previous policy report on Aug. 4, the RBI had warned of upside risks to its inflation target that warranted "a heightened state of policy preparedness" to contain any risks if they materialize.
    The RBI's medium-term objective under Governor Raghuram Rajan is to reduce consumer price inflation to 6 percent by January 2016 with a desired decline to 8 percent by January 2015.
    Since June India's headline inflation rate has dropped below 8 percent and fell to 7.8 percent in August from 7.96 percent in July when it was pushed up by higher vegetable prices.
   "The most heartening feature has been the steady decline in inflation excluding food and fuel, by a cumulative 111 basis points since January 2014 to a new low," Rajan said in a statement, adding that softening crude prices and a stable exchange rate had led to a receding of upside risks.

   "Yet, there are risks from food price shocks as the full effects of the monsoon's passage unfold, and from geo-political developments that could materialize rapidly," he added.
    Large increases in food prices from a skewed distribution of rain raised the contribution of food to inflation in August to almost 60 percent but vegetable prices have recently declined. Base effects will temper inflation in the next few months but then push it up by end-year.
    At its last meeting in August, the RBI also trimmed the statutory liquidity ratio (SLR) by a further 50 basis points to 22.5 percent - it had already cut it by 50 basis points in June - but today it left it unchanged, just as the cash reserve ratio (CRR) was maintained at 4.0 percent.
    But the RBI reduced the amount of liquidity that it provides under its export credit finance (ECR) facility to 15 percent from 32 percent.
    After a strong performance in the first quarter of the current 2014/15 fiscal year, which began on April 1, India's economy slowed a bit in the second quarter, with industrial output slumping as capital goods production followed consumer durables into a contraction. But exports cushioned the fall in manufacturing and exports are seen expanding further.
    Activity in all sectors has yet to stabilize, Rajan said, with industrial activity first gaining speed after consumption and investment demand resumes. Agriculture should shed the effects of the recent shocks -  rainfall is expected to be about 12 percent deficient - and pick up in the fourth quarter of the current financial year.
    The RBI retained its forecast for economic growth in 2014/15 at 5.5 percent, within a range of 5-6 percent, with the growth path slowing middy in the second and third quarters before recovering in the fourth quarter.
    In the first quarter of 2014/15 - or the second calendar quarter - India's Gross Domestic Product expanded by 1.2 percent from the previous quarter for annual growth of 5.7 percent, up from 4.6 percent in the previous quarter.
    Globally, economic activity has been recovering slowly after the first quarter slump, but growth in the euro area continues to be weak and major emerging markets continue to struggle with tepid domestic demand and headwinds from structural impediments, Rajan said.
    Continued "highly accommodative" monetary policy in advanced economies has increased the appetite for risk among investors and with low volatility financial markets have risen, "driving surges of capital flows to EMEs."
    "Apart from concerns about a sudden correction in financial markets if investors misread the timing of a reversal of the US monetary policy stance or if geopolitical tensions intensify, some downside risks to growth also persist, such as a possible further slowdown in the euro area," he added.
    India's current account deficit, one of the main reasons that global investors became jittery over India last year, narrowed to 1.7 percent of GDP in the first quarter of 2014/15 and in the April-August period the trade deficit was narrower than a year ago, notwithstanding the slowdown in export growth in July and August, Rajan said, adding that international reserves have continued to grow although the increase as denominated in U.S. dollars has moderated given the dollar's appreciation.
     
    www.CentralBankNews.info

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