RBI monetary policy review: Key takeaways

* Global financial markets have been boosted by expectations of normalisation of US monetary policy being pushed back into late 2015. Long-term yields have declined to all-time lows on weak inflation expectations, compression of term premiums and the safe haven allure of US Treasuries.

* Domestic economic activity is likely to have strengthened in Q4. Second advance estimates of the Ministry of Agriculture suggest that the contraction in food grains production in 2014-15 may turn out to be less than earlier anticipated. Growth in allied activities is likely to remain strong as in the recent past, though it remains to be seen whether it will fully compensate the decline in food grains output.

* The industrial sector, and in particular, manufacturing appears to be regaining momentum with the growth of production in positive territory for three consecutive months till January. Mixed signals are coming from the service sector.

* Retail inflation measured by the year-on-year changes in the revised consumer price index (CPI) firmed up for the third successive month in February as favourable base effects dissipated, despite the price index remaining virtually flat since December. Inflation excluding food and fuel fell successively in the nine months till February. A large part of this disinflation has been on account of the slump in international crude oil prices.

* At current levels in the first quarter of 2015-16, CPI inflation is projected at around 4 percent by August but firming up to reach 5.8 percent by the end of the year. The Reserve Bank will stay focussed on ensuring that the economy disinflates gradually and durably, with CPI inflation targeted at 6 percent by January 2016 and at 4 percent by the end of 2017-18.

* Export performance has been progressively weakening and contraction set in on both non-oil and petroleum product exports since December 2014. Exports of services, particularly, software and travel have provided a silver lining and have helped to hold down the current account deficit (CAD) which has narrowed in Q3. This improvement has likely extended into Q4.

* The outlook for growth is improving gradually. Comfortable liquidity conditions should enable banks to transmit the recent reductions in the policy rate into their lending rates, thereby improving financing conditions for the productive sectors of the economy.

* In order to improve the efficiency of monetary policy transmission, the Reserve Bank will encourage banks to move in a time-bound manner to marginal-cost-of-funds-based determination of their base rate. Detailed guidelines will be issued shortly.

* As part of continuing measures to promote liquidity, the Reserve Bank will formulate a scheme for market making by primary dealers in semi-liquid and illiquid government securities. Details of the scheme will be worked out and implemented in consultation with market participants within the next three months.

The second bi-monthly monetary policy statement will be announced on June 2, 2015.