Second Quarter Review of the Monetary Policy for 2011-12
-Announced on the 25th October 2011
Part A. Monetary Policy
III. The Policy Stance
44. The Reserve Bank began exiting from the crisis driven expansionary policy in October 2009. Since then, the Reserve Bank has cumulatively raised the cash reserve ratio (CRR) by 100 basis points, and raised the policy rate (the repo rate) 12 times by 350 basis points. The effective tightening has been of 500 basis points as liquidity in the system transited from surplus to deficit. This monetary policy response has been calibrated on the basis of India specific growth-inflation dynamics in the broader context of persistent global uncertainty.
45. Considering the persistence of inflation at a level much above the comfort zone of the Reserve Bank for almost two years, the Reserve Bank persevered with its anti-inflationary stance during the current year.
46. The monetary policy tightening effected so far has helped in containing inflation and anchoring inflation expectations, even as both remain elevated. While the impact of past monetary actions is still unfolding, it is necessary to persist with the anti-inflationary stance. Against that background, the policy stance in this review is shaped by the following two major considerations.
47. First, both inflation and inflation expectations remain high. Inflation is broad-based and above the comfort level of the Reserve Bank. Further, these levels are expected to persist for two more months. Risks to expectations becoming unhinged in the event of a pre-mature change in the policy stance cannot be ignored. However, reassuringly, momentum indicators, particularly the de-seasonalised quarter-on-quarter headline and core inflation measures indicate moderation, consistent with the projection that inflation will begin to decline beginning December 2011.
48. Second, growth is clearly moderating on account of the cumulative impact of past monetary policy actions as well as some other factors. As inflation begins to decline, the opportunity emerges for the policy stance to give due consideration to growth risks, within the overall objective of maintaining a low and stable inflation environment.
49. Against this backdrop, the stance of monetary policy is intended to:
Maintain an interest rate environment to contain inflation and anchor inflation expectations.
Stimulate investment activity to support raising the trend growth.
Manage liquidity to ensure that it remains in moderate deficit, consistent with effective monetary transmission.
Second Quarter Review of Monetary Policy 2011-2012... click here
Highlights of 1st Quarter Review of Monetary Policy 2011-2012... click here
Macroeconomic & Monetary developments: Second Quarter Review 2011-12... click here
RBI CREDIT AND MONETARY POLICIES (1999-2012)... click here