Annual Monetary Policy Statement for the Year 2011-12- 3rd May 2011
Part A. Monetary Policy
IV. Monetary Measures
Report of the Working Group on Operating Procedure of Monetary Policy
55. Following the First Quarter Review of Monetary Policy for 2010-11 (July 2010), the Reserve Bank constituted a Working Group to Review the Operating Procedure of Monetary Policy in India (Chairman: Shri Deepak Mohanty). The Report of the Group was placed in public domain on March 15, 2011 for feedback and comments.
56. Based on the Groupís recommendations and in the light of the feedback received, it has been decided to make the following changes in the extant operating procedures of monetary policy:
(i) The weighted average overnight call money rate will be the operating target of monetary policy of the Reserve Bank.
(ii) There will henceforth be only one independently varying policy rate and that will be the repo rate. The transition to a single independently varying policy rate is expected to more accurately signal the monetary policy stance.
(iii) The reverse repo rate will continue to be operative but it will be pegged at a fixed 100 basis points below the repo rate. Hence, it will no longer be an independent rate.
(iv) A new Marginal Standing Facility (MSF) will be instituted from which SCBs can borrow overnight up to one per cent of their respective NDTL. The rate of interest on amount accessed from this facility will be 100 basis points above the repo rate. A notification is being issued separately providing for a general waiver of default from SLR compliance, freeing banks from the obligation of seeking a specific waiver of default as is the case now. This facility is expected to contain volatility in the overnight inter-bank market.
(v) As per the above scheme, the revised corridor will have a fixed width of 200 basis points. The repo rate will be in the middle. The reverse repo rate will be 100 basis points below it and the MSF rate 100 basis points above it.
(vi) While the width of the corridor is fixed at 200 basis points, the Reserve Bank will have the flexibility to change the corridor, should monetary conditions so warrant.
57. The above changes in the operating framework other than at (iv) above will come into force with immediate effect. Change under (iv) will come into effect from the fortnight beginning May 7, 2011. Detailed guidelines in this regard are being issued separately.
58. On the basis of the policy stance as outlined in Section III, and changes in operating procedures as set out above, the Reserve Bank announces the following policy measures :
59. It has been decided to:
increase the repo rate under the liquidity adjustment facility (LAF) by 50 basis points from 6.75 per cent to 7.25 per cent with immediate effect.
Reverse Repo Rate
60. The reverse repo rate under the LAF, determined with a spread of 100 basis point below the repo rate, automatically adjusts to 6.25 per cent with immediate effect.
Marginal Standing Facility (MSF) Rate
61. The Marginal Standing Facility (MSF) rate, determined with a spread of 100 basis points above the repo rate, stands calibrated at 8.25 per cent. This rate will come into effect on operationalisation of the MSF.
62. The Bank Rate has been retained at 6.0 per cent.
Cash Reserve Ratio
63. The cash reserve ratio (CRR) of scheduled banks has been retained at 6.0 per cent of their NDTL.
Savings Bank Deposit Interest Rate
64. As indicated in the Second Quarter Review of Monetary Policy 2010-11, the discussion paper delineating the pros and cons of deregulating the savings bank deposit interest rate was placed on the Reserve Bankís website on April 28, 2011 for feedback from the general public.
65. In the recent period, the spread between the savings deposit and term deposit rates has widened significantly. Therefore, pending a final decision on the issue of deregulation of savings bank deposit interest rate, it has been decided to :
increase the savings bank deposit interest rate from the present 3.5 per cent to 4.0 per cent with immediate effect.
66. Detailed instructions in this regard to banks are being issued separately.
67. The monetary policy actions in this review are expected to:
i) contain inflation by reining in demand side pressures, and anchor inflationary expectations; and
ii) sustain the growth in the medium-term by containing inflation.
68. The Bank's baseline inflation projections, as indicated in Chart 2 (page 9), are that the inflation rate will remain close to the March 2011 level over the first half of 2011-12, before declining. These projections factor in an upward revision of petrol and diesel prices. While the persistence of inflation over the next few months has been incorporated in this policy, the Reserve Bank will continue to persevere with its anti-inflationary stance.
Mid-Quarter Review of Monetary Policy
69. The next mid-quarter review of Monetary Policy for 2011-12 will be announced through a press release on Thursday, June 16, 2011.
First Quarter Review of Monetary Policy 2011-12
70. The First Quarter Review of Monetary Policy for 2011-12 is scheduled for Tuesday, July 26, 2011.
Click Here For Highlights of Annual Policy Statement for the Year 2011-12
Click Here For Macro economic and Monetary Developments : 2010-11