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Second Quarter Review of Monetary Policy click here
Second Quarter Review of Monetary Policy 2010-11
-Announced on the 2nd November 2010
I. The State of the Economy
Domestic Economy
22. On the basis of large spectrum auction realisations, buoyant tax revenues and in anticipation of significant inflows from disinvestment during the current year, the Government announced that it would pare its market borrowing by `10,000 crore in the second half of the financial year. Further, on October 21, 2010, as a part of its cash management operations, the Government, in consultation with the Reserve Bank, announced the repurchase of government securities amounting to `28,553 crore maturing during 2010-11. The repurchase operations would be funded through the surplus cash balances of the Government. In the first tranche, repurchase of securities for an aggregate amount of `12,000 crore was notified and `2,148 crore was accepted in the auction held on October 26, 2010.
23. The increase in the overall revenue realisation of the Government during the current year is a welcome development. It virtually eliminates the possibility of the fiscal deficit overshooting the budget estimate. Fiscal consolidation is important for a number of reasons, including the fact that monetary policy works most efficiently, particularly when it is dealing with an inflationary situation, when the fiscal situation is under control. Several things are important to make the fiscal consolidation effort credible and effective. The focus must be as much on expenditure restructuring as on revenue augmentation, recurring expenditure commitments should not be made against one off revenues such as from disinvestment and the quality of adjustment should not be lost sight of.
24. The combination of liquidity conditions and revised government borrowing estimates have had contrasting impacts on the yield curve. At the short end, as the LAF window operated in deficit mode, the overnight interest rates were generally close to the ceiling of the LAF rate corridor during September-October 2010, even exceeding it on occasions in response to sudden surges in demand. However, at the long end, the announced reduction in net borrowing of the Central Government had a downward impact on government bond yields, as the 10-year benchmark government security yield fell to about 7.92 per cent in early October 2010 from a high of 8.07 per cent in August. Yields have risen again recently, reaching a high of 8.14 per cent on October 20, 2010, reflecting the tightening of liquidity conditions.
25. Domestic equity prices firmed up significantly in recent weeks due to large inflows from foreign institutional investors (FIIs), driven by better domestic growth prospects and a surfeit of global liquidity. The foreign exchange market, which witnessed a significant increase in net inflows beginning September 2010, has remained orderly with the rupee showing two-way movements in the range of `44.03 – `44.74 per US dollar during October 2010.
26. During 2010-11 so far (October 22, 2010), the rupee appreciated by 0.4 per cent on the basis of trade based 36-currency real effective exchange rate (REER). The extent of appreciation was, of course, higher on the basis of 6-currency trade based REER (3.1 per cent) reflecting both the nominal appreciation of the rupee against the US dollar during this period and the higher inflation differential with major advanced countries. Since the 36-currency REER includes the currencies of many countries which are India’s direct competitors in the global market, it is a better reflection of the impact of global exchange rate movements on competitiveness. The relatively small appreciation in this index reflects the fact that many competing countries have also seen their currencies appreciate during this period. From this perspective, the impact of the recent nominal appreciation of the rupee may not have a significant implication for competitiveness.
27. The continuing sluggishness of the global economy led to some moderation in exports growth and invisible receipts, while import growth accelerated due to the strong domestic recovery. Consequently, both the trade deficit and the current account deficit (CAD) widened in Q1 of 2010-11. If the current trend persists, CAD as a percentage of GDP will be significantly higher than in the previous year. It is generally perceived that a CAD above 3 per cent of GDP is difficult to sustain over the medium-term. The challenge, therefore, is to rein in the deficit over the medium-term and finance it in the short-term. The medium-term task has to receive policy focus from both the Government and the Reserve Bank. The short-term task is to see that the current account is fully financed while ensuring that capital flows are not far out of line with the economy’s absorptive capacity and that the component of long-term and stable flows in the overall capital flows is high.
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>>> The State of the Economy-Global Economy
Second Quarter Review of Monetary Policy 2010-11 ... click here
Highlights of 2nd Quarter Review of Monetary Policy 2010-2011... click here
RBI CREDIT AND MONETARY POLICIES (1999-2011)... click here
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