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Special Features        Top Stories        Daily News     RBI Credit Policies (1999-2005)


Highlights of the Mid-term Review of Annual Policy for the year 2005-06


Dr. Y.Venugopal Reddy, Governor, Reserve Bank of India has announced Mid-term Review of Annual Policy Statement for the year 2005-06 on the 25th October 2005.

The highlights of Mid-term Review of Annual Policy for the year 2005-06 are:

Domestic Developments

Based on the current assessment of a pick-up in agricultural output and in the momentum in other sectors, GDP growth projection for 2005-06 revised to 7.0-7.5 per cent from the earlier projection of around 7.0 per cent.

Annual inflation, as measured by point-to-point variations in wholesale price index, receded from 6.0 per cent in April 2005 to 4.6 per cent in October 2005.

Inflation in the range of 5.0-5.5 per cent as projected. Forward looking policy response is necessary to realise growth momentum and potential for higher growth without adding to inflation expectations.

Money supply (M3) may turn out to be somewhat higher than the earlier projection of 14.5 per cent for the full year. Aggregate deposit growth also expected to be higher than earlier projection.

Year-on-year adjusted non-food credit is expected to increase significantly higher than 19.0 per cent projected earlier.

Financial markets have remained stable and orderly, although interest rates have firmed up in almost all segments. The yield curve has steepened. Significant increase in CBLO volumes.

Total liquidity sterilised in the form of MSS, LAF and surplus balances of Central Government increased from an average of about Rs.1,14,192 crore in March 2005 to Rs.1,20,076 crore in October 2005.

The market borrowing programme of the Central Government has so far remained consistent with the projections set out in the Union Budget for 2005-06.

External Developments

Exports in US dollar terms in the first half of 2005-06 increased by 20.5 per cent compared with 30.8 per cent in the corresponding period in the previous year. Imports rose by 33.1 per cent as against an increase of 37.3 per cent in the corresponding period last year. Hardening of international crude oil prices and import demand emanating from a pick-up in domestic industrial activity contributed to the import growth observed.

Foreign exchange reserves stood at US$ 143.4 billion as on October 14, 2005, increasing from US$ 141.5 billion as at end-March 2005.

Evolving developments in the balance of payments warrant careful monitoring in view of oil prices and continued strong investment demand.

Foreign exchange market witnessed orderly conditions in the first half of 2005-06. The exchange rate of the rupee depreciated by 3.0 per cent to US dollar by October 21, 2005, from Rs.43.75 per US dollar at end-March 2005 to Rs.45.09 per US dollar. However, it appreciated by 4.2 per cent against the Euro, by 2.5 per cent against the Pound sterling and by 4.5 per cent against the Japanese yen during the period

Global Developments

Global economic activity remained robust but slackened moderately in the second quarter of 2005; Likely growth of 4.3 per cent in 2005 from 5.1 per cent in 2004.

Rise in oil prices has triggered inflationary pressures globally, remaining the single largest risk to the global economy.

Risks to global growth also emanate from the persisting macroeconomic imbalances and the resulting abundance of global liquidity, asset bubbles, excessive leveraging in financial markets.

Overall Assessment

On balance, macroeconomic and financial conditions have evolved as anticipated. Overall industrial growth has strengthened, monsoon fears have eased, non-food credit growth has been buoyant, the demand for government securities has been sustained and a pick-up in investment demand is evident.

Some downward risks to the economic outlook have emerged in the recent months. Ensuring credit quality and increasing the pace of investment in infrastructure is important. Asset prices have registered a substantial increase. The overall positive sentiment, the business confidence of the private sector and the strength as well as resilience of the domestic economy would continue to determine capital flows.

Stance of Monetary Policy

The Reserve Bank will continue to ensure that appropriate liquidity is maintained in the system so that all legitimate requirements of credit are met, consistent with the objective of price stability. Towards this end, RBI will continue with its policy of active demand management of liquidity through open market operations including MSS, LAF and CRR, and using all the policy instruments at its disposal flexibly, as and when the situation warrants.

Barring the emergence of any adverse and unexpected developments in various sectors of the economy and keeping in view the current assessment of the economy including the outlook for inflation, the overall stance of monetary policy for the remaining part of the year will be: (i) Consistent with emphasis on price stability, provision of appropriate liquidity to meet genuine credit needs and support export and investment demand in the economy. (ii) Ensuring an interest rate environment that is conducive to macroeconomic and price stability, and maintaining the growth momentum. (iii) To consider measures in a calibrated and prompt manner, in response to evolving circumstances with a view to stabilising inflationary expectations.

Monetary Measures

Bank Rate kept unchanged at 6.0 per cent.

Reverse Repo Rate increased by 25 basis points to 5.25 per cent, effective October 26, 2005. The spread between reverse repo rate and the repo rate under LAF maintained at 100 basis points.

The cash reserve ratio (CRR) kept unchanged at 5.0 per cent.



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