On the basis of an assessment of the current and evolving macroeconomic situation, it has been decided to:
keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0 per cent;
keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liabilities (NDTL);
reduce the statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points from 22.5 per cent to 22.0 per cent of their NDTL with effect from the fortnight beginning August 9, 2014; and
continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL and liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system.
Consequently, the reverse repo rate under the LAF will remain unchanged at 7.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 9.0 per cent.
2. Since the second bi-monthly monetary policy statement of June 2014, global economic activity has been picking up at a modest space from a sharp slowdown in Q1. Investor risk appetite has buoyed financial markets, partly drawing strength from assurances of continuing monetary policy support in industrial countries. Portfolio flows to emerging market economies (EMEs) have risen strongly. This implies, however, that EMEs remain vulnerable to changes in investor risk appetite driven by any reassessment of the future path of US monetary policy or possible escalation of geopolitical tensions.
3. Sentiment on domestic economic activity appears to be reviving, with incoming data suggesting a firming up of industrial growth and exports. The June round of the Reserve Bankís industrial outlook survey also points to improvement in business expectations in Q2. Leading indicators of the services sector are mixed, although there are early signs of modest strengthening of corporate sales and business flows. While the initial slow progress of the monsoon and its uneven spatial distribution raised serious concerns regarding agricultural production, these have been mitigated, though not entirely dispelled, by the pick-up in the monsoon through much of the country in July. The implementation of government policy actions that have been announced should create a congenial setting for a steady improvement in domestic demand and supply conditions.
4. Retail inflation measured by the consumer price index (CPI) has