Mid-Quarter Monetary Policy Review: December 2013

Dalal Street Investment Journal, which is known for its perfect predictions has done it yet again!
 
As we predicted, the RBI has kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 7.75% and the cash reserve ratio (CRR) of scheduled banks unchanged at 4% of the net demand and time liability (NDTL). Consequently, the reverse repo rate under the LAF will remain unchanged at 6.75%, and the marginal standing facility (MSF) rate and the Bank Rate at 8.75%.
 
Following are excerpts of the policy review assessment as well as the regulator’s stance and rationale, from the RBI’s press release on December 18 -  
 
“The outlook for global growth continues to remain moderate, with an uneven recovery across industrial countries. Activity in major emerging market economies (EMEs) barring China has decelerated on account of weak domestic demand, notwithstanding some improvement in export performance...
 
In India, the pick-up in real GDP growth in Q2 of 2013-14, albeit modest, was driven largely by robust growth of agricultural activity, supported by an improvement in net exports. However, the weakness in industrial activity persisting into Q3, still lacklustre lead indicators of services and subdued domestic consumption demand suggest continuing headwinds to growth...

...There is, however, reason to wait before determining the course of monetary policy. There are indications that vegetable prices may be turning down sharply, although trading mark-ups could impede the full pass-through into retail inflation. In addition, the disinflationary impact of recent exchange rate stability should play out into prices. Finally, the negative output gap, including the recent observed slowdown in services growth, as well as the lagged effects of effective monetary tightening since July, should help contain inflation.
 
The policy decision is a close one. Current inflation is too high. However, given the wide bands of uncertainty surrounding the short term path of inflation from its high current levels, and given the weak state of economy, the inadvisability of overly reactive policy action, as well as the long lags with which monetary policy works, there is merit in waiting for more data to reduce uncertainty...”