MONETARY POLICY REVIEW

MID-QUARTER: DECEMBER 2013 In view of the current macro-economic scenario and expected moderation in inflation, the Reserve Bank of India in its midquarter monetary policy review of December 2013, has decided to keep its key interest rates at status-quo. The monetary policy stance has been mainly influenced by the current levels of high inflation and future expectations of the same which is expected to come down. The Key rates stand as follows: Key Rates (%) Cash Reserve Ratio Statutory Liquidity Ratio Repo Rate Reverse Repo Rate Marginal Standing Facility Bank Rate Current 4.0% 23 7.75% 6.75% 8.75% 8.75% Previous 4.0% 23 7.75% 6.75% 8.75% 8.75% Change No change No change No change No change No change No change

On the domestic front, RBI states that the liquidity conditions have improved, as reflected in the steady decline in the access to the MSF. Besides, the capital inflows under the Reserve Banks swap facilities for banking capital and nonresident deposits have augmented domestic liquidity significantly. On the other hand, the narrowing of trade deficit is expected to continue further which should bring down the current account deficit to a more sustainable level for the year as a whole. HIGHLIGHTS: Global overview: The outlook for global growth continues to remain moderate, with an uneven recovery across industrial countries. Activity in major emerging market economies barring China has decelerated on account of weak domestic demand. While volatility in financial markets has receded, it could pick up again following the tapering of quantitative easing in the USA. Domestic Growth: GDP witnessed a modest pickup in Q2 2013-14, driven largely by robust growth of agricultural activity, supported by an improvement in net exports. This has partly offset the weakness in industrial and service activity both of which continue to remain subdued. Going forward, tightening in government spending to meet budget projections and revival of stalled investments will also be key sensitivities to growth. Inflation: Inflation levels remain above RBIs comfort zone. Rising CPI and WPI remain a concern; upside pressures are evident across all constituent components. High inflation, both at wholesale and retail level risks entrenching inflation expectations at higher levels, and poses a threat to growth. Liquidity: Lower utilisation of LAF and export credit refinance window, coupled with steady decline in MSF access were indicative of easing liquidity. Going ahead, RBI expects temporary tightness in liquidity from mid-December 2013 because of advance tax payments. To ease liquidity further, RBI conducted an additional 14-day term repo auction of Rs.100 billion on December 13, 2013. It also opened a refinance facility of Rs. 50 billion for SIDBI aimed at addressing liquidity stress faced by SMEs and ensuring adequate credit flow to the productive sectors of the economy. CAD: The narrowing of the trade deficit since June through November, on positive export growth and contraction in both oil and non-oil imports, should bring the current account deficit (CAD) down to a more sustainable level for the year as a whole. Robust inflows into the swap windows opened by the Reserve Bank during August-November have contributed significantly to rebuilding foreign exchange reserves thus covering possible external financing requirements and providing stability to the foreign exchange market.