08 December 2016 Current Affairs: The Reserve Bank of India (RBI) has released the fifth Bi-monthly Monetary Policy Statement 2016-17, the first policy review post-demonetisation.
The key announcement under the policy was that the policy Repo Rate under the Liquidity Adjustment Facility (LAF) was kept unchanged at 6.25 percent. This decision was taken on the basis of an assessment of the current and evolving macroeconomic situation.
Reverse Repo Rate: Consequently, the Reverse Repo Rate under the LAF remains unchanged at 5.75 percent.
Marginal standing facility (MSF) Rate: The MSF rate was also kept unchanged at 6.75 percent.
Bank Rate: The Bank Rate also stands at 6.75 percent.
The policy decision was taken by Monetary Policy Committee (MPC) of Reserve Bank of India.
Global growth picked up modestly in the second half of 2016. Activity in Advanced Economies (AEs) improved following the recovery in the US economy.
In the Emerging Market Economies (EMEs), growth was moderate, but policy stimulus in China shored up momentum.
International financial markets were strongly impacted by the result of the US presidential elections 2016 and incoming data raised the probability of the Federal Reserve tightening monetary policy.
Following the election results, the surge of the US dollar from late October intensified and resulted in considerable depreciations in currencies around the world. Gold lost its safe place to the increasing US dollar. Crude prices firmed after the OPEC’s decision to cut output.
On the domestic front, the growth of real Gross Value Added (GVA) in Q2 of 2016-17 turned out to be lower due to the slowdown in industrial activity. Manufacturing slowed down consecutively. Gross fixed capital formation contracted for the third consecutive quarter.
In Q3, the Committee felt that the assessment is impacted by the withdrawal of specified bank notes (SBNs) under the demonetisation plan. The agriculture sector showed the robust performance in Q2. By contrast, industrial activity remained weak.
Among the core industries in the Index of Industrial Production (IIP), the output of coal contracted in October due to less demand, while the production of crude oil and natural gas contracted under the binding constraint of structural impediments.
The production of cement, fertilisers and electricity continued to slow down. On the other hand, steel output recorded nonstop expansion following the application of countervailing duties.
The demonetisation plan could momentarily interrupt some part of industrial activity in November-December due to delays in payments of wages and purchases of inputs.
In the services sector, the outlook is mixed with construction, trade, transport, hotels and communication impacted by demonetisation effects.
While public administration, defence and other services would continue to be sustain by the 7th Central Pay Commission (CPC) award and one rank one pension (OROP).
Retail inflation measured by Consumer Price Index (CPI) eased more than expected for the third consecutive month in October, driven down by a sharper than anticipated deflation in the prices of vegetables.
The elevated prices of sugar and protein-rich items, along with a turning up of prices of cereals, pulses and processed foods pushed up the momentum of food prices.
In the fuel category, inflation eased with the decline in LPG prices on an annual basis and a fall in electricity prices from a month ago. Inflation excluding food and fuel continues to show strong persistence.
Although housing and personal care inflation diminished marginally, the steady rise in inflation in respect of education, medical and health services, transport and communication imparted stickiness to inflation.
Liquidity conditions underwent large shifts in Q3 so far. Surplus conditions in October and early November were overwhelmed by the impact of demonetisation from 8 November 2016. Currency in circulation fell by Rs 7.4 trillion up to 2 December 2016.
Consecutively, deposits surged into the banking system leading to a massive increase in its excess reserves. The RBI scaled up its liquidity operations through variable rate reverse repo auctions of a wide range of tenors from overnight to 91 days, absorbing liquidity of Rs 5.2 trillion.
In the external sector, India’s merchandise exports rebounded in September and October. After a prolonged fall for 22 months, imports rose in October on the back of a sharp rise in the volume of gold imports and higher payments for POL imports.
Net Foreign Direct Investment remained reasonably good with more than half going to manufacturing, communication and financial services.
The level of foreign exchange reserves was 364 billion USD on 2 December 2016.