several categories of services underlines the need to revitalise productivity and competitiveness.
Retail inflation measured by the consumer price index (CPI) moderated for the third month in succession in February 2014, driven lower by the sharp disinflation in food prices, although prices of fruits, milk and products have started to firm up. Excluding food and fuel, however, retail inflation remained sticky at around 8 per cent. This suggests that some demand pressures are still at play.
The merchandise trade deficit was 22 per cent lower in April-February 2013-14 than its level a year ago, due to the large decline in non-oil imports. The steady narrowing of the trade deficit over the year has shrunk the current account deficit (CAD) to 0.9 per cent of GDP in Q3 of 2013-14. For the year as a whole, the CAD is expected to be about 2.0 per cent of GDP. Most recently, however, export growth has slowed, partly because of slowdown in demand in partner countries as well as a softening of prices of exports of petroleum products and gems and jewellery (offset by a reduction in the prices of oil and gold imports). Whether the export slowdown persists as global growth picks up once again remains to be seen. In February, there was a turnaround in portfolio flows as investors largely priced in the effects of taper by the US Fed and responded to economic and geo-political developments in emerging markets with re-allocations. With sustained inflows in the form of portfolio flows, foreign direct investment (FDI) and external commercial borrowings, external financing conditions turned comfortable. Inflows, augmented by repayments by public sector oil marketing companies of their foreign currency obligations to the Reserve Bank during March, have led to an increase in reserves.
Turning to liquidity, envisaging pressures from large currency demand and tax outflows from mid-March, a 21-day term repo of Rs 500 billion was conducted on March 14 and 7-day term repo auctions of `100 billion on March 19 and 26, in addition to the regular 14-day term repo of `400 billion on March 21. A 5-day term repo for a notified amount of `200 billion was conducted on March 28 to facilitate non-disruptive banking operations during the annual closing of accounts. Access to the MSF on March 29 and 31 (holidays) was also allowed for this purpose. The Reserve Bank will continue to monitor the liquidity conditions and