Policy
Measures
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The Monetary Policy Committee (MPC) decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.00%.
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Consequently, the reverse repo rate under the LAF remains unchanged at 5.75%, and the marginal standing facility (MSF) rate and the Bank Rate are at 6.25%.
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The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth.
Assessment
Global
economic activity
has
strengthened further and become broad-based. Among advanced economies
(AEs), the US has continued to expand with revised Q2 GDP growing at
its strongest pace in more than two years, supported by robust
consumer spending and business fixed investment. Euro area
economic recovery gained further traction, underpinned by domestic
demand. While private consumption benefited from employment gains,
investment rose on the back of favourable financing conditions.
The
Japanese economy continued on a path of healthy expansion despite a
downward revision in growth since March 2017 on weaker than expected
capital expenditure.
Strong
growth in Q2 in China was powered by retail sales, and imports grew
at a rapid pace, suggesting robust domestic demand.
The
Brazilian economy expanded for two consecutive quarters in Q2 on
improving terms of trade, even as the impact of recession persists on
the labour market. Economic activity in Russia recovered further,
supported by strengthening global demand, firming up of oil prices
and accommodative monetary policy. Although South Africa has emerged
out of recession in Q2, the economy faces economic and political
challenges.
The
latest assessment by the WTO indicates a significant improvement in
global trade in 2017, backed by a resurgence of Asian trade flows and
rising imports by North America. Crude oil prices
hit a two-year high in September on account of the combined effect of
a pick-up in demand, tightening supplies due to production cuts by
the OPEC and declining crude oil inventories in the US. Bullion
prices touched a year’s high in early September on account of
safe-haven demand due to geo-political tensions. Weak non-oil
commodity prices and low wage growth kept inflation pressures low in
most AEs and subdued in several EMEs, largely reflecting
country-specific factors.
Global
financial markets
have been driven mainly by the changing course of monetary policy in
AEs, generally improving economic prospects and oscillating
geo-political factors. Equity markets in most AEs have continued to
rise.
In
EMEs, equities generally gained on improved global risk appetite,
supported by upbeat economic data and expectations of a slower pace
of monetary tightening in major AEs. While bond yields in major AEs
moved sideways, they showed wider variation in EMEs. The euro
surged to a two and a half year high against the US dollar towards
end-August on positive economic data. Most AE and EME currencies
showed divergent movements.
In
India
GVA growth slowed significantly in Q1 of 2017-18, cushioned partly by
the extensive front-loading of expenditure by the central government.
GVA growth in agriculture and allied activities slackened in the
usual first quarter moderation. Industrial sector GVA growth fell
sequentially as well as on a y-o-y basis. The manufacturing sector –
the dominant component of industrial GVA – grew by 1.2 per cent,
the lowest in the last 20 quarters. The mining sector contracted,
services
sector performance, however, improved markedly, construction, as
well as, financial, real estate & professional services,
picked up pace.
Of
the constituents of aggregate demand, growth in private consumption
expenditure was at a six-quarter low in Q1 of 2017-18. Gross fixed
capital formation exhibited a modest recovery in Q1 in contrast to a
contraction in the preceding quarter.
The
uneven spatial distribution of the monsoon was reflected in the first
advance estimates of kharif
production,
which were below the level of the previous year.
IIP
recovered marginally in July 2017 from the contraction in June on the
back of a recovery in mining, quarrying and electricity generation.
However, manufacturing remained weak. In terms of the use-based
classification, contraction in capital goods, intermediate goods and
consumer durables pulled down overall IIP growth. In August, however,
the output of core industries posted robust growth on the back of an
uptick in coal production and electricity generation.
Retail
inflation,
measured by year-on-year change in the CPI, edged up sequentially in
July
and
August to reach a five month high. After a decline in prices in June,
food inflation rebounded in the following two months, driven mainly
by a sharp rise in vegetable prices. Cereals inflation remained
benign, while deflation in pulses continued for the ninth successive
month. Fuel group inflation remained broadly unchanged in August.
Petroleum product prices tracked the hardening of international crude
oil prices.
CPI
inflation excluding food and fuel also increased sharply in July and
further in August, reversing from its trough in June.
A
large liquidity
overhang,
fuelled mainly by the front-loading of government spend, which
necessitated frequent recourse to ways and means advances and
overdrafts over the greater part of this period, imparted a downside
bias to overnight money market rates in H1 of 2017-18. Surplus
liquidity
in the system
persisted through Q2 even as the build-up in government cash balances
since mid-September 2017 due to advance tax outflows reduced the size
of the surplus liquidity significantly in the second half of the
month. Active liquidity operations narrowed the spread between
the WACR and the policy rate from 31 bps in April to 13 bps in
September. The RBI conducted OMO sales on six occasions during Q2 to
absorb Rs. 600 billion of surplus liquidity on a durable basis. Net
average absorption of liquidity under the LAF declined from Rs. 3
trillion in July to Rs. 1.6 trillion in the second half of September.
The weighted average CMR, which on an average, traded below the repo
rate by 18 bps during July, firmed up by 5 bps in September on
account of higher demand for liquidity around mid-September in
response to advance tax outflows.
Reflecting
improving global demand, merchandise
export
growth picked up in August 2017 after decelerating in the preceding
three months. Engineering goods, petroleum products and chemicals
were the major contributors to export growth in August 2017; growth
in exports of readymade garments and drugs & pharmaceuticals too
returned to positive territory.
Import
growth
remained in double-digits for the eighth successive month in August
and was fairly broad-based. While the surge in imports of crude oil
and coal largely reflected a rise in international prices, imports of
machinery, machine tools, iron and steel also picked up. Gold import
volume has declined sequentially since June.
The
sharper increase in imports relative to exports resulted in a
widening of the CAD
in Q1 of 2017-18,
even as net services exports and remittances picked up. Net
FDI
at US$10.6 billion in April-July 2017 was 24% higher than during the
same period of last year. While the debt segment of the domestic
capital market attracted FPI
of US$14.4 billion, there were significant outflows in the equity
segment in August-September on account of geo-political uncertainties
and expected normalisation of Fed asset purchases. India’s foreign
exchange reserves
were at US$399.7 billion on September 29, 2017.
Outlook
The
projection
of real GVA growth for 2017-18
has been revised down to 6.7 per cent from the August 2017 projection
of 7.3 per cent, with risks evenly balanced. The loss of
momentum in Q1 of 2017-18 and the first advance estimates of kharif
foodgrains production are early setbacks that impart a downside to
the outlook. The implementation of the GST so far also appears to
have had an adverse impact, rendering prospects for the manufacturing
sector uncertain in the short term. This may further delay the
revival of investment activity, which is already hampered by stressed
balance sheets of banks and corporates.
Headline
inflation
was projected at 3 per cent in Q2 and 4.0-4.5 per cent in the second
half of 2017-18. Actual inflation outcomes so far have been broadly
in line with projections, though the extent of the rise in inflation
excluding food and fuel has been somewhat higher than
expected. Taking into account domestic and international
factors, including food prices, price revisions pending the GST, the
house rent allowance by the Centre and international crude prices,
inflation is expected to rise from its current level and range
between 4.2-4.6 per cent in the second half of this year.
Developmental
and Regulatory Policies
The
RBI also set out various developmental and regulatory policy measures
for further improving monetary transmission; strengthening banking
regulation and supervision; broadening and deepening financial
markets; and, extending the reach of financial services by enhancing
the efficacy of the payment and settlement systems:
Measures
to Improve Monetary Policy Transmission:
Arbitrariness in calculating the base
rate/MCLR
and spreads charged over them has undermined the integrity of the
interest rate setting process. The base rate/MCLR regime is also not
in sync with global practices on pricing of bank loans. A Study Group
has, therefore, recommended a switchover to an external benchmark in
a time-bound manner.
Banking
Regulation and Supervision: As
a part of the transition to a LCR of 100% by January 1, 2019, the SLR
will be reduced
by 50 bps, from 20.0% to 19.50% of banks’ NDTL, from the fortnight
commencing October 14, 2017. The ceiling on SLR securities under
‘Held to Maturity’ (HTM) will also be reduced from 20.25% to
19.50% of banks’ NDTL in a phased manner, i.e., 20.00% by December
31, 2017 and 19.50% by March 31, 2018.
High-level
Task Force on Public
Credit Registry
(PCR) will propose a state-of-the-art information system, allowing
for existing systems to be strengthened and integrated, and suggest a
modular, prioritized roadmap for developing a transparent,
comprehensive and near-real-time PCR for India.
It
has been decided to require banks to make it mandatory for corporate
borrowers having aggregate fund-based and non-fund based exposure of
Rs. 50 million and above from any bank to obtain Legal Entity
Identifier (LEI) registration and capture the same in the Central
Repository of Information on Large Credits (CRILC). This will
facilitate assessment of aggregate borrowing by corporate groups, and
monitoring of the financial profile of an entity/group.
The
regulatory norms have been eased in order to enable
all co-operative banks to open current accounts
and maintain CRR with the Reserve Bank. All the regional offices of
the Reserve Bank have been advised to issue no objection certificates
for opening current accounts for all licensed co-operative banks
other than those under all-inclusive directions.
The
P2P
platform has been notified as an NBFC
under section 45I (f) (iii) of the Reserve Bank of India Act, 1934 as
per the gazette notification published on September 18, 2017.
Banks
to put in place explicit mechanisms for meeting the needs
of senior citizens and differently abled persons
for availing banking facilities in branches.
Financial
Markets: The
Reserve Bank shall put in place a framework for authorisation of
electronic
trading platforms (ETP)
for financial market instruments regulated by the Reserve Bank.
A
Foreign
Exchange Trading Platform
is proposed for improving the pricing outcome for the “retail user”
(to be defined in terms of transaction size) under which client
pricing is directly determined in the market by providing customers
with access to an inter-bank electronic trading platform where
bid/offers from clients and Authorised Dealer banks can be matched
anonymously and automatically.
Non-resident
importers and exporters (NRIE)
entering into rupee invoiced trade transactions with residents will
be permitted to
hedge their INR exposures
through their centralised treasury/group entities. This is expected
to facilitate internationalisation of the rupee by encouraging rupee
invoicing of trade transactions while also encouraging non-residents
to hedge INR risks onshore.
A
detailed review
of current regulations on FPI debt investment
shall be undertaken to facilitate the process of investment and
hedging by FPIs, keeping in mind macro-prudential considerations.
Regulatory changes to be finalised in consultation with the
Government of India and the SEBI will be effective from April 2018.
Smoother
settlement of short sale transactions
is necessary for orderly functioning of the market. Towards this end,
it has been decided that (i) a short seller need not borrow
securities for ‘notional short sales’, wherein it is required to
borrow the security even when the security is held in the
held-for-trading/available-for-sale/held-to-maturity portfolios of
banks; and, (ii) OTC G-sec transactions by FPIs may be contracted for
settlement on a T+1 or T+2 basis.
In
order to further develop liquidity
in the State Development Loan (SDL) market,
spread the issuance of SDLs, move towards market-based pricing that
is sensitive to individual state’s fiscal risk metrics, and reduce
uncertainties in announcement of auction results, the following
measures are being proposed:
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Consolidation of state government debt will be undertaken to improve liquidity in SDLs through reissuances and buybacks, so as to even out redemption pressures and elongate residual maturity.
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SDL auctions will be conducted on a weekly basis and the auction results will be announced latest by 3.00 PM on the same day.
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High frequency data relating to finances of state governments available with the Reserve Bank will be disclosed on its website.
The
Union Budget 2016-17 announced that the Reserve Bank will facilitate
retail
participation in the primary and secondary markets through stock
exchanges.
Accordingly, after consultation with the SEBI, it is proposed that:
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specified stock exchanges, in addition to scheduled banks and primary dealers, will be permitted to act as aggregators/facilitators for retail investor bids in the non-competitive segment for the auction of dated securities and treasury bills of the Government of India.
Payment
and Settlement: In
line with the Vision for Payment
and Settlement Systems
in the country, a revised framework will pave the way for bringing
inter-operability into usage of PPIs.
