First Quarter Review of the Monetary Policy for 2011-12
-Announced on the 26th July 2011
III. The Policy Stance
52. Since October 2009, when the Reserve Bank signalled the reversal of its crisis driven expansionary monetary policy stance, it has raised the cash reserve ratio (CRR) by 100 bps. It has also raised the policy rate (the repo rate) ten times by a cumulative 275 bps. As the liquidity in the system transited from surplus to deficit, the effective tightening has been of the order of 425 bps.
53. The monetary policy response in 2010-11 was calibrated on the basis of India specific growth-inflation dynamics in the broader context of global uncertainties and perceived slowdown in the second half of the year. However, considering the persistence of inflation above the comfort level of the Reserve Bank, and based on the premise that high inflation is inimical to long-term growth, the Reserve Bank has persevered with its anti-inflationary stance in 2011-12.
54. Against the backdrop of global and domestic macroeconomic conditions, outlook and risks, our policy stance for 2011-12 has been conditioned by the following major considerations.
55. First, demand pressures have remained strong. As indicated in the May 3 Policy Statement, inflation was expected to remain elevated in the first half of 2011-12. Actual inflation so far has been even higher than expected. The sharp revision in non-food manufactured products inflation during February-April 2011 confirms the assessment of strong demand pressures. Crude oil prices remain volatile and are a major risk. The recent increase in domestic administered fuel prices and the minimum support price for certain food items will keep inflation under pressure.
56. Second, there are signs that growth is beginning to moderate, particularly in respect of some interest sensitive sectors. However, there is no evidence of a sharp or broad-based slowdown as yet. Several indicators such as exports and imports, indirect tax collections, corporate sales and earnings and demand for bank credit suggest that demand is moderating, but only gradually. As such demand side inflationary pressures continue to prevail. Although the impact of past monetary policy actions is still getting transmitted, considering the overall growth and inflation scenario, there is a need to persevere with the anti-inflationary stance.
57. Against the above backdrop, the stance of the monetary policy of the Reserve Bank will be as follows:
Maintain an interest rate environment that moderates inflation and anchors inflation expectations.
Manage the risk of growth falling significantly below trend.
Manage liquidity to ensure that monetary transmission remains effective, without exerting undue stress on the financial system.
First Quarter Review of Monetary Policy 2011-2012... click here
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