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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

III. The Policy Stance

34. The Reserve Bank has pursued an accommodative monetary policy beginning mid-September 2008 in order to mitigate the adverse impact of the global financial crisis on the Indian economy. The measures taken instilled confidence in market participants and helped cushion the spillover of the global financial crisis on to our economy. However, in view of rising food inflation and the risk of it impinging on inflationary expectations, the Reserve Bank announced the first phase of exit from the expansionary monetary policy by terminating some sector-specific facilities and restoring the statutory liquidity ratio (SLR) of scheduled commercial banks to its pre-crisis level in the Second Quarter Review of October 2009.

35. Against the above backdrop of global and domestic macroeconomic conditions, outlook and risks, our policy stance in this Quarter is shaped by three important considerations:

(i) A consolidating recovery should encourage us to clearly and explicitly shift our stance from 'managing the crisis' to 'managing the recovery'. We articulated this change in our stance in the October quarterly review, but the growing confidence in the recovery justifies our moving further in reversing the crisis-driven expansionary stance. Our main policy instruments are all currently at levels that are more consistent with a crisis situation than with a fast-recovering economy. It is, therefore, necessary to carry forward the process of exit further.

(ii) Though the inflationary pressures in the domestic economy stem predominantly from the supply side, the consolidating recovery increases the risks of these pressures spilling over into a wider inflationary process. Looking ahead into 2010-11, if the growth momentum turns out to be as expected, pressures on capacities in an increasing number of sectors are likely to strengthen the transmission of higher input and wage costs into product prices.

(iii) Even amidst concerns about rising inflation, we must remember that the recovery is yet to fully take hold. Strong anti-inflationary measures, while addressing one problem, may precipitate another by undermining the recovery, particularly by deterring private investment and consumer spending.

36. Against this backdrop, the stance of monetary policy of the Reserve Bank for the remaining period of 2009-10 will be as follows:

Anchor inflation expectations and keep a vigil on the trends in inflation and be prepared to respond swiftly and effectively through policy adjustments as warranted.

Actively manage liquidity to ensure that credit demands of productive sectors are adequately met consistent with price stability.

Maintain an interest rate environment consistent with price stability and financial stability, and in support of the growth process.

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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