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Third Quarter Review of RBI Monetary Policy 2008-09
-Announced on the 27th January 2009 by Dr. D Subbarao, Governor, Reserve Bank of India

This quarterly review is set in the context of a deteriorating global economic outlook and heightened uncertainty about the global financial sector. In fact, there has been a rapid and marked downturn in the global economic outlook since the Reserve Bank’s Mid-term Review in October 2008. The continued bad news from large international financial institutions on a regular basis renews concerns as to when the global financial sector might attain a semblance of stability.

2. The initial hope that the crisis could be contained in the financial sector has been belied. With all the advanced economies – the US, Europe and Japan – firmly in recession, the crisis has fully transmitted from the financial sector to the real economy. The loss of confidence in the global financial markets has set off a chain of deleveraging, declining asset values, falling income, contracting demand and rising unemployment. Governments and central banks around the world are responding to the crisis with bold and unconventional initiatives. Even so, there is a contentious debate on whether these measures are adequate and appropriate, and when, if at all, they will begin to have an impact. There is also considerable uncertainty about when we might see the bottom of the asset and business cycle. There is emerging consensus though that there may be no recovery till late 2009; indeed, some analysts believe that recovery may be delayed beyond 2009. Contrary to the expectation of decoupling, which was a commonly held view even till recently, the crisis has spread to the emerging economies too through all the channels – the financial channel, the real channel, and importantly as happens in all financial crises, through the confidence channel.

3. The Indian economy experienced a cyclical moderation in growth accompanied by high inflation in the first half of 2008-09. There is now distinct evidence of further slowdown as a consequence of the global downturn. The knock-on effects of the global financial crisis, economic slowdown, and falling commodity prices are affecting the Indian economy in several ways. Capital flow reversals intensified in September and October 2008 though they have stabilised since then; international credit channels continue to be constrained; capital market valuations remain low; industrial production growth has slackened; export growth has turned negative during October-November 2008; and overall business sentiment has deteriorated. On the positive side, the headline inflation has decelerated, though consumer price inflation is yet to show moderation; and the domestic financial markets are functioning in an orderly manner. Although bank credit growth has been higher than in the previous year, rough calculation shows that flow of overall financial resources to the commercial sector in the current financial year has declined marginally as compared with the previous year. This was on account of decline in other sources of funding such as resource mobilisation from the capital market and external commercial borrowings (ECBs).

4. To manage the impact of the crisis, since mid-September 2008, the Reserve Bank has taken a number of monetary easing and liquidity enhancing measures. The Government has also launched two fiscal stimulus packages to boost aggregate demand. Against this background, this Statement provides:

Section I- Macroeconomic and Monetary Developments
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Section II- Stance of Monetary Policy
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Section III- Monetary Measures
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Macroeconomic and Monetary Developments Third Quarter Review 2008-09 was released on 26th Jan 2009, to serve as a backdrop to the Third Quarter Review of Monetary Policy 2008-09. Click Here

Click for Highlights of Third Quarter Review of RBI Monetary Policy 2008-09

83. The Annual Policy Statement for 2009-10 will be announced on April 21,2009.

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