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RBI's 5th Bi-Monthly Monetary Policy Overview

Today, RBI Governor Dr. Raghuram Rajan announced the Fifth Bi-monthly Monetary Policy for the Financial Year 2015-16.

Here's a brief overview of the same.

1. As you would be aware, RBI had made a rather hefty cut of 0.50% in the policy interest rates at the previous monetary policy announcement in September. Therefore, as expected, this time there have been no further rate reductions.

2. Moreover, banks are still reluctant to pass on the policy rate cuts to their borrowers. As such, even though RBI has brought down the policy rates by 1.25% since January this year, the average rate reduction by banks has been only 0.60%.

3. RBI is hopeful that further rate transmission would happen when 
(a) the banks move to the new base rate formula based on marginal cost of funds, to be announced shortly and 
(b) the Govt. reduces the rates on various small savings schemes, which are still quite high compared to the market rates.

Synopsis of the RBI's 5th Bi-Monthly Monetary Policy Statement

4. Based on how the economic parameters pan out, RBI may further bring down the policy rates, while ensuring that the inflation moderates to 5% by Mar 2017.

5. But for a few exceptions, manufacturing and services sectors are showing signs of recovery and robust growth. Weak rural demand and slowing construction activity are the two major areas, that are still in the negative territory.

6. Besides, due to poor and inconsistent monsoon, together with the low reservoir levels, the outlook for the agricultural sector is also not so bright. This is likely to push up the food inflation.

7. Accordingly, the projection for economic growth for 2015-16 is maintained at 7.4%, with a "mild downside bias".

8. The target of 6% inflation by Mar 2016 too is maintained, with a slight downside risk. Though the CPI has been rising for the last few months, the said target seems achievable.

9. Globally, the economic growth is still weak. Large economies like US, Euro and China, as also the emerging economies, continue to "face headwinds". The global financial market has remained relatively calm. This may see some turbulence when the US starts tightening its monetary policy, which is soon expected.

10. US dollar has already strengthened on expectations of the rate increase in the US. This is likely to affect portfolio inflows into India and the price of commodities including gold. While lower commodity prices is good for India, subdued gold prices will impact the investors in gold.

11. Weak global demand continues to affect the Indian exports; which are in the declining trend for almost a year now.

12. Going forward, implementation of the 7th Pay Commission is expected to push up the wages and rent. RBI will focus on the impact of the same, on the economic growth and inflation.

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