Annual Monetary Policy Statement for the Year 2011-12- 3rd May 2011
Part A. Monetary Policy
III. The Policy Stance
50. The Reserve Bank began exiting from the crisis driven accommodative policy in October 2009. Since then, the cash reserve ratio (CRR) has been raised by 100 basis points. Policy rates have been raised eight times - the repo rate under the LAF by 200 basis points and the reverse repo rate by 250 basis points. The effective tightening in policy rates has been of 350 basis points as the liquidity in the system transited from a surplus to a deficit mode.
51. The monetary policy stance in 2010-11 was calibrated on the basis of the domestic growth-inflation dynamics amidst persistent global uncertainties. Against the backdrop of global and domestic macroeconomic conditions, outlook and risks, the policy stance for 2011-12 has been guided by the following major considerations.
52. First, notwithstanding some moderation in the second half of the year, inflation has persistently remained much above the comfort level of the Reserve Bank. The sharp increase in non-food manufactured product inflation towards the latter part of the year suggests strong underlying demand pressures, which are helping producers to pass through input price increases. The uncertainty in global commodity prices poses a major risk to domestic inflation as the significant increase in global crude prices that has already taken place, is yet to be passed through to domestic prices. The impact of monetary tightening already undertaken by the Reserve Bank is still unfolding. However, considering the overall inflation scenario, there is a clear need to persist with the anti-inflationary stance.
53. Second, while the growth momentum remained relatively firm during 2010-11, signs of moderation emerged in the latter half of the year, particularly with respect to capital goods and investment activity. Growth is expected to decelerate from 8.6 per cent in 2010-11 to around 8 per cent in 2011-12, which should contribute to some easing of demand-side inflationary pressures, particularly in the second half, as the full impact of monetary tightening is realised. However, even as this trend unfolds, persistently high rates of inflation raise the risks of inflationary expectations becoming unhinged.
54. Against this backdrop, the stance of monetary policy of the Reserve Bank will be as follows:
Maintain an interest rate environment that moderates inflation and anchors inflation expectations.
Foster an environment of price stability that is conducive to sustaining growth in the medium-term coupled with financial stability.
Manage liquidity to ensure that it remains broadly in balance, with neither a large surplus diluting monetary transmission nor a large deficit choking off fund flows.
Click Here For Highlights of Annual Policy Statement for the Year 2011-12
Click Here For Macro economic and Monetary Developments : 2010-11