Highlights of Second Quarter Review of Monetary Policy 2009-2010
-Announced on the 27th October 2009
Inflation assessment has become increasingly complex in recent times in view of the wide divergence between the inflation rate based on the WPI and the various CPI inflation measures. The situation was aggravated by the deficient monsoon rainfall and drought condition in several parts of the country. While CPI inflation is now in double digit, the WPI inflation rate remains low.
Taking into account the global trend in commodity prices and the domestic demand-supply balance, the base line projection for WPI inflation at end-March 2010 is placed at 6.5 per cent with an upward bias. This is higher than that of 5.0 per cent WPI inflation projected in the July 2009 Review as the upside risks have materialised.
Keeping in view the borrowing requirement of the Government and of the commercial sector in the remaining period of 2009-10, the indicative projection of money supply growth of 18 per cent set out in July 2009 Review is revised downwards to 17 per cent. Consistent with this, aggregate deposits of scheduled commercial banks are projected to grow by 18 per cent. The growth in adjusted non-food credit, including investment in bonds/debentures/shares of public sector undertakings and private corporate sector and CPs, is also revised downwards to 18 per cent from 20 per cent set out earlier. Banks are urged once again to step up their efforts towards credit expansion while preserving credit quality, which is critical for revival of growth.
Managing the Recovery: Some Issues
The attention around the world, as also in India, has shifted from managing the crisis to managing the recovery. The policy dilemma for India is different in some important respects from that of advanced economies as well as other emerging market economies for the following reasons:
Most of these countries do not face an immediate risk of inflation, whereas India is actively confronted with an upturn in inflation.
India has the challenge of reviving domestic consumption and investment demand, the traditional, dominant drivers of our growth, although households, firms and financial institutions in India are not struggling with impaired balance sheets unlike in advanced economies.
India has traditionally been a supply constrained economy in contrast to advanced economies which are demand starved. The supply constraints, which remained subdued during the crisis period due to weak demand, will re-emerge and may indeed become binding.
India is one of the few large emerging economies with twin deficits – fiscal and current account deficits.
Around the world there is an active debate on the timing and sequencing of exit from the expansionary monetary stance. ‘Exit’ is a central issue in our policy matrix too. The challenge for the Reserve Bank is to support the recovery process without compromising on price stability. Growth drivers warrant a delayed exit, while inflation concerns call for an early exit. Premature exit will derail the fragile growth, but a delayed exit can potentially engender inflation expectations. This calls for a careful management of trade-offs.
The balance of judgment at the current juncture is that it may be appropriate to sequence the ‘exit’ in a calibrated way so that while the recovery process is not hampered, inflation expectations remain anchored.
Monetary Policy Stance
On the basis of the above overall assessment, the stance of monetary policy for the remaining period of 2009-10 will be as follows:
Keep a vigil on the trends in inflation and be prepared to respond swiftly and effectively through policy adjustments to stabilise inflation expectations.
Monitor the liquidity situation closely and manage it actively to ensure that credit demands of productive sectors are adequately met while also securing price stability and financial stability.
Maintain a monetary and interest rate regime consistent with price stability and financial stability, and supportive of the growth process.
The Reserve Bank will continue to monitor the price situation in its entirety and will take measures as warranted by the evolving macroeconomic conditions swiftly and effectively.
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(Source-Press Statement by Dr. D. Subbarao, Governor on 2nd Quarter Review of Monetary Policy)
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