RBI's Second Quarter Review of Monetary Policy 2012-13 - 30th Oct 2012
III. The Policy Stance
43. In response to rising inflation pressures in the period January 2010 - October 2011, the Reserve Bank started monetary tightening. This helped in moderating inflation from its peak of 10.9 per cent in April 2010 to an average level of 7.5 per cent over the period January-August 2012. Over this period, however, growth slowed down and is currently below trend. This slowdown is due to a host of factors, including monetary tightening.
44. Since April 2012, the monetary policy stance has sought to balance the growth–inflation dynamic through calibrated easing. The transmission of these policy impulses through the economy is underway, and in conjunction with the fiscal and other measures recently announced, should work towards arresting the loss of growth momentum over the next few months. As inflation eases further, there will be an opportunity for monetary policy to act in conjunction with fiscal and other measures to mitigate the growth risks and take the economy to a sustained higher growth trajectory.
45. It is important, however, to note that inflation turned up again in September. To some extent, this reflected the partial pass-through of revisions of diesel and electricity prices which, notwithstanding their contribution to inflation, were absolutely necessary. Besides, underlying inflationary pressures reflected in non-food manufactured products inflation has remained stubbornly above comfort levels. Accordingly, it is critical that even as the monetary policy stance shifts further towards addressing growth risks, the objective of containing inflation and anchoring inflation expectations is not de-emphasised.
46. Against this backdrop, the stance of monetary policy is intended to:
manage liquidity to ensure adequate flow of credit to the productive sectors of the economy;
reinforce the positive impact of government policy actions on growth as inflation risks moderate; and
maintain an interest rate environment to contain inflation and anchor inflation expectations.
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