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Full Text of Third Quarter Review of Monetary Policy click here

Third Quarter Review of Monetary Policy 2009-2010
-29th January 2010

II. Outlook and Projections

Domestic Outlook


19. During 2009-10, real GDP growth accelerated from 6.1 per cent in Q1 to 7.9 per cent in Q2 driven by revival in industrial growth, and pick-up in services sector growth, aided by payment of arrears arising out of the Sixth Pay Commission Award. It is expected that Q3 growth, which will reflect the full impact of the deficient south-west monsoon rainfall on kharif crops, would be lower than that of Q2. As rabi prospects appear to be better, on the whole, agricultural GDP growth in 2009-10 is expected to be near zero.

20. As a result of the improvement in the global economic situation since the Second Quarter Review in October 2009, exports expanded in November 2009, after contracting for 13 straight months. This positive trend is expected to persist. The industrial sector recovery, some signs of which were noted in the Second Quarter Review, is now consolidating. The performance of the corporate sector has picked up. Increased business optimism also reflects brighter prospects for the industrial sector. Services sector activities have improved. Domestic and international financing conditions have eased considerably, and this too should support domestic demand.

21. In the Second Quarter Review of October 2009, we had placed the baseline projection for GDP growth for 2009-10 at 6.0 per cent with an upside bias. The movements in the latest indicators of real sector activity indicate that the upside bias has materialised. Assuming a near zero growth in agricultural production and continued recovery in industrial production and services sector activity, the baseline projection for GDP growth for 2009-10 is now raised to 7.5 per cent o 6.2 per cent in 2010 from 5.2 per cent in 2009 due to low slack in resource utilisation and increased capital inflows.

22. Looking ahead to 2010-11, our preliminary assessment of the baseline scenario is that the current growth will be sustained. This is a tentative assessment. We shall formally indicate our growth projection for 2010-11 in our Monetary Policy in April 2010.


23. Headline wholesale price index (WPI) inflation was 1.2 per cent in March 2009. It continued to decline and became negative during June-August 2009 due to the large statistical base effect. It turned positive in September 2009, accelerated to 4.8 per cent in November 2009 and further to 7.3 per cent in December 2009. On a financial year basis, between April-December 2009, WPI moved up by 8 per cent.

24. The deficient monsoon rainfall and drought conditions in several parts of the country have accentuated the pressure on food prices, pushing up the overall inflation rate – both of the WPI and consumer price indices (CPIs). Going forward, the rabi crop prospects are assessed to be better. The large stock of foodgrains with public agencies should help supply management. On the other hand, there is a risk that inflationary pressures may emanate from the rebound in global commodity prices.

25. Assessment of inflationary pressures has become increasingly complex in the recent period as the WPI and CPI inflation rates have shown significant divergence. All the four CPIs have remained elevated since March 2008 due to the sharp increase in essential commodity prices. The Reserve Bank monitors an array of measures of inflation, both overall and disaggregated components, in conjunction with other economic and financial indicators to assess the underlying inflationary pressures for formulating its monetary policy stance.

26. The Second Quarter Review of October 2009 projected WPI inflation of 6.5 per cent with an upside bias for end-March 2010. The upside risks in terms of higher food prices reflecting poor monsoon have clearly materialised. However, some additional factors have also exerted upward pressure on WPI inflation. One, the expected seasonal moderation has not taken place, other than in vegetables. Two, prices of the non-administered component of the fuel group, tracking the movement in global crude prices, have also risen significantly. Three, there have also been some signs of demand side pressures. The Reserve Bank's quarterly inflation expectations survey for households indicates that inflation expectations are on the rise. Keeping in view the global trend in commodity prices and the domestic demand-supply balance, the baseline projection for WPI inflation for end-March 2010 is now raised to 8.5 per cent

27. As with growth, we shall formally announce our inflation projection for 2010-11 in our Monetary Policy in April 2010. However, on the assumption of a normal monsoon and global oil prices remaining around the current level, it is expected that inflation will moderate from July 2010. This moderation in inflation will depend upon several factors, including the measures taken and to be taken by the Reserve Bank as a part of the normalisation process.

28. As always, the Reserve Bank will endeavour to ensure price stability and anchor inflation expectations. The conduct of monetary policy will continue to condition and contain perception of inflation in the range of 4.0-4.5 per cent. This will be in line with the medium-term objective of 3.0 per cent inflation consistent with India’s broader integration with the global economy.

Money and Credit Aggregates

29. During the current financial year, the year-on-year growth in money supply (M3) moderated from over 20.0 per cent at the beginning of the financial year to 16.5 per cent on January 15, 2010, reflecting deceleration in bank credit growth during 2009-10. Year-on-year increase in non-food bank credit to the commercial sector, at 14.4 per cent as on January 15, 2010, was significantly lower than the 22.0 per cent growth a year ago. Consequently, the more important source of M3 expansion this year has been bank credit to the government, reflecting the enlarged support to the market borrowing of the government and unwinding of MSS securities.

30. Aided by the measures initiated by the Reserve Bank (see para 13), over 98 per cent of the net market borrowing programme of the Central Government for 2009-10 has already been completed by January 28, 2010. The anticipated increase in credit demand by the commercial sector in the remaining period of 2009-10 can, therefore, be easily met from the market as adequate liquidity is available in the system. In view of the increased availability of funds from domestic non-bank and external sources (see para 8), the 18 per cent growth in adjusted non-food credit growth projected earlier is unlikely to be realised. Accordingly, the indicative adjusted non-food credit growth projection for 2009-10 is now reduced to 16 per cent. Based on this projected credit growth and the remaining very marginal market borrowing of the government, the projected M3 growth in 2009-10 has been reduced to 16.5 per cent for policy purposes. Consistent with this, aggregate deposits of scheduled commercial banks are projected to grow by 17 per cent. These numbers, as before, are provided as indicative projections and not as targets.


Third Quarter Review of Monetary Policy 2009-2010... click here

Highlights of 3rd Quarter Review of Monetary Policy 2009-2010... click here

RBI CREDIT AND MONETARY POLICIES (1999-2010)... click here

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