final CURRENT MONETARY POLICY

8/7/2019 final CURRENT MONETARY POLICY

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CURRENT MONETARY

POLICY


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The Monetary Policy for 2010-11 set a situationwhich is more reassuring than it was a quarter ago,

uncertainty about the shape and pace of global

recovery persists.

Indias growth-inflation dynamics are in contrast to

the overall global scenario.

The economy is recovering rapidly from the growth

slowdown but inflationary pressures, which weretriggered by supply side factors, are now developing

into a wider inflationary process.


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Indias rapid turnaround after the crisis inducedslowdown evidences the resilience of our economy

and our financial sector. However, this should not

divert us from the need to bring back into focus the

twin challenges of macroeconomic stability and

financial sector development.

This statement is organised in two parts. Part A covers

Monetary Policy and is divided into four Sections.

Part B covers Developmental and Regulatory Policies

and is organised into six sections.


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PART (A). MONETARY POLICY

Section (I). The State of the Economy

Global Economy

The global economy continues to recover amidst

ongoing policy support and improving financial marketconditions.

The global economy continues to face several challenges

such as high levels of unemployment, which are close to

10 per cent in the US and the Euro area.


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Core measures of inflation in major advanced economies

are still moderating as the output gap persists and

unemployment remains high.


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DOMESTIC ECONOMY

The Reserve Bank had projected the real GDP growthfor 2009-10 at 7.5 per cent.

The uptrend in industrial activity continues. The index of

industrial production (IIP) recorded a growth of 17.6 per

cent in December 2009, 16.7 per cent in January 2010and 15.1 per cent in February 2010.

After a continuous decline for eleven months, imports

expanded by 2.6 per cent in November 2009, 32.4 per

cent in December 2009, 35.5 per cent in January 2010

and 66.4 per cent in February 2010.


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The acceleration in non-oil imports since November

2009 further evidences recovery in domestic demand

After twelve months, exports have turned around since

October 2009 reflecting revival of external demand.


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A sharp recovery of growth during 2009-10 despite the

worst south-west monsoon since 1972 attests to the

resilience of the Indian economy increasing private

consumption (36 per cent), government consumption (14per cent), fixed investments (26 per cent) and net exports

(20 per cent).

Growth in monetary and credit aggregates during 2009-

10 remained broadly in line with the projections set out

in the Third Quarter Review in January 2010


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Non-food bank credit expanded steadily during the

second half of the year from its intra-year low of 10.3

per cent in October 2009 to 16.9 per cent by March

2010.

Scheduled commercial banks (SCBs) raised their

deposit rates by 25-50 basis points between February and

April 2010 signalling a reversal in the trend of reduction

in deposit rates


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The Reserve Bank absorbed about Rs.1,00,000 crore on

a daily avg.basis under the liquidity adjustment facility

(LAF) during the current financial year up to February

12, 2010,till the crr came into affect. During February 27- March 31, 2010, the average daily

absorption of surplus liquidity declined to around Rs.

38,200 crore reflecting the increase in the CRR


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II. OUTLOOK AND PROJECTIONS

Global Outlook (growth)

In its World Economic Outlook Update for January

2010, the International Monetary Fund (IMF) projected

that global growth will recover from (-) 0.8 per cent in2009 to 3.9 per cent in 2010 and further to 4.3 per

cent in 2011.

Three major factors that have contributed to the

improved global outlook are the massive monetaryand fiscal support, improvement in confidence and a

strong recovery in EMEs.


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US GDP rose by 5.6 per cent on an annualized basis

during Q4 of 2009. However, household spending

remains constrained by high unemployment at 9.7 per

cent.


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Inflation

Inflation rates rose between November 2009 and January

2010, softened in February 2010 on account of

moderation of food, metal and crude prices and againrose marginally in some major economies in March 2010


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Domestic Outlook

Growth

According to the Reserve Banks quarterly industrial outlook

survey, the business expectation index (BEI) showedseasonal moderation from 120.6 in Q4 of 2009-10 to 119.8 inQ1 of 2010-11, it was much higher in comparison with thelevel of 96.4 a year ago.

The improved performance of the industrial sector isreflected in the improved profitability in the corporatesector. Service sector activities have shown buoyancy,especially during the latter half of 2009-10.


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Inflation

Headline WPI inflation, which moderated in the first half

of 2009-10, firmed up in the second half of the year.

It accelerated from 1.5 per cent in October 2009 to 9.9

per cent by March 2010. The deficient south-west

monsoon rainfall accentuated the pressure on food prices

The Reserve Banks baseline projection of WPIinflation for March 2010 was 8.5 per cent.


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Monetary Aggregates

During 2009-10, money supply growth decelerated

from over 20.0 per cent at the beginning of the

financial year to 16.4 per cent in February 2010

before increasing to 16.8 per cent by March 2010,

slightly above the Reserve Banks indicative projection

of 16.5 per cent. This was reflected in non-food credit

growth of 16.9 per cent, above the indicative

projection of 16.0 per cent.


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III. THE POLICY STANCE

. In the wake of the global economic crisis, the

Reserve Bank pursued an accommodative

monetary policy beginning mid-September

2008. This policy instilled confidence in market

participants, mitigated the adverse impact of

the global financial crisis on the economy and

ensured that the economy started recoveringahead of most other economies


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The process was carried forward by the second

phase of exit when the Reserve Bank announced a

75 basis points increase in the CRR in the Third

Quarter Review of January 2010.

As inflation continued to increase, driven

significantly by the prices of non-food

manufactured goods, and exceeded the ReserveBanks baseline projection of 8.5 per cent for

March 2010


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IV. MONETARY MEASURES

Bank Rate

The Bank Rate has been retained at 6.0 per

cent.

Repo Rate

It has been decided to:

increase the repo rate under the Liquidity

Adjustment Facility (LAF) by 25 basis points

from 5.0 per cent to 5.25 per cent with

immediate effect.


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Reverse Repo Rate


increase the reverse repo rate under the LAF by 25basis points from 3.5 per cent to 3.75 per cent with

immediate effect. Cash Reserve Rate


increase the cash reserve ratio (CRR) of scheduled

banks by 25 basis points from 5.75 per cent to 6.0per cent of their net demand and time liabilities(NDTL) effective the fortnight beginning April 24,2010.

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