Third Quarter Review of Monetary Policy 2011-12
-Announced on the 24th January 2012
III. The Policy Stance
44. The Reserve Bank began exiting from the crisis driven expansionary policy in October 2009. Between January 2010 and October 2011, the Reserve Bank cumulatively raised the cash reserve ratio (CRR) by 100 basis points and the policy rate (the repo rate) 13 times by 375 basis points. This monetary policy response was calibrated on the basis of India specific growth-inflation dynamics. The focus of the monetary policy stance during May-October 2011 was on containing inflation and anchoring inflation expectations even as it meant sacrificing some growth. However, in view of slowdown in growth, especially investment activity and expected moderation in inflation beginning December, it was decided to pause in the MQR of December 2011.
45. Since November 2011, inflation has broadly followed the projected trajectory and has shown moderation as expected. Even as inflation remains elevated, despite moderation, downside risks to growth have increased. The growth-inflation balance of the monetary policy stance has now shifted to growth, while at the same time ensuring that inflationary pressures remain contained. Accordingly, the policy stance in this review is shaped by the following three major considerations.
46. First, growth is decelerating. This reflects the combined impact of several factors: the uncertain global environment, the cumulative impact of past monetary policy tightening and domestic policy uncertainties. Credit offtake has also been below the projected trajectory. While slowdown in the growth of demand was the expected outcome of monetary policy actions that were taken to contain inflation, at this juncture, risks to growth have increased. This is also reflected in the scaling down of the growth projection for 2011-12 by the Reserve Bank.
47. Second, though headline WPI inflation is moderating, it largely reflects a sharp deceleration in prices of seasonal food items. Inflation in respect of other key components, particularly protein-based food items and non-food manufactured products remains high. Moreover, upside risks to inflation arise from global crude oil prices, the lingering impact of rupee depreciation and slippage in the fiscal deficit.
48. Third, liquidity conditions have remained tight beyond the comfort zone of the Reserve Bank. Although the Reserve Bank has conducted open market purchase of government securities to inject liquidity of over Rs700 billion, the structural deficit in the system has increased significantly, which could hurt the credit flow to productive sectors of the economy. The large structural deficit in the system presents a strong case for injecting permanent primary liquidity into the system.
49. Against this backdrop, the stance of monetary policy is intended to:
Maintain an interest rate environment to contain inflation and anchor inflation expectations.
Manage liquidity to ensure that it remains in moderate deficit, consistent with effective monetary transmission.
Respond to increasing downside risks to growth.
Macroeconomic and Monetary Developments: Third Quarter Review 2011-12 ...Click Here
Highlights of Third Quarter Review of Monetary Policy 2010-11....Click Here
RBI CREDIT AND MONETARY POLICIES (1999-2012)