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Full Text of Third Quarter Review of Monetary Policy click here

Third Quarter Review of Monetary Policy 2009-2010
-Press Statement by Dr. D. Subbarao, Governor

This morning, I had a meeting with the chiefs of major banks where we released and disseminated the Third Quarter Review of RBIís monetary policy. First a few words on the response of the banks before I give an overview of the macroeconomic situation and the Reserve Bankís policy stance.

Banks generally welcomed the Reserve Bankís policy stance. They indicated that the monetary measures announced by the Reserve Bank may not put immediate pressure on lending rates. Apart from monetary policy, discussions centred around specific issues such as (i) credit growth and monetary transmission; (ii) government market borrowing programme;(iii) infrastructure financing; and (iv) financial inclusion. Banks felt that credit growth prospects remain favourable going forward. They emphasised the need to expand their capital to sustain their lending operations in future. Banks indicated that they have reduced their lending rates responding to earlier monetary easing by the Reserve Bank.

Consequently, their net interest margins have come under pressure. Non-performing assets (NPAs) are expected to increase, particularly from the restructured assets. They felt that if the government borrowings next year are large, they could put pressure on resources and interest rates as credit is expected to pick up significantly. Banks were concerned about their growing exposure to the infrastructure sector and suggested that policy intervention is required from the Government and the Reserve Bank to address the issue of the asset-liability mismatch and exposure in their balance sheets. Finally, banks assured the Reserve Bank that they share its commitment to financial inclusion and indicated that they are working on expanding banking facilities in unbanked areas.

Global Economy

The global economy is showing increasing signs of stabilisation with the Asian region experiencing a relatively stronger rebound. Global economic performance improved during the third and fourth quarters of 2009, prompting the IMF to reduce the projected rate of economic contraction in 2009 from 1.1 per cent made in October 2009 to 0.8 per cent in January 2010. The IMF has also revised the projection of global growth for 2010 to 3.9 per cent, up from 3.1 per cent. However, significant risks remain: (i) the recovery is driven largely by government spending in many economies; (ii) commodity and asset prices have risen aided by high levels of global liquidity; and (iii) emerging market economies (EMEs), which are generally recovering faster than advanced economies, are likely to face increased inflationary pressures.

Indian Economy


The Indian economy showed a degree of resilience as it recorded a better-than-expected growth of 7.9 per cent during the second quarter of 2009-10. Subsequent data releases confirm the assessment that the economy is steadily gaining momentum, though public expenditure continues to play a dominant role, and performance across sectors is uneven, suggesting that recovery is yet to become sufficiently broad-based.

In the Second Quarter Review of October 2009, we projected GDP growth for 2009-10 of 6 per cent with an upside bias. Recent movements in the indicators of real sector activity suggest 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.

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


For several months, rapidly rising food inflation has been a cause for concern. There are indications that the sustained increase in food prices is beginning to spill over into other commodities and services as well. The October 2009 Review projected WPI inflation for end-March 2010 of 6.5 per cent with an upside bias. The upside risk in terms of higher food prices reflecting the poor south-west monsoon has already materialised. Some additional factors such as higher global crude prices and less than expected seasonal moderation in food prices have also exerted upward pressure on inflation. Based on the latest evidence, the baseline projection for WPI inflation for end-March 2010 is now raised to 8.5 per cent.

As in the case of growth, we shall formally announce our inflation projection for 2010-11 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 on several factors, including the measures taken and to be taken by the Reserve Bank as a part of the normalisation process.

Money and Credit Aggregates

During the current financial year, the year-on-year growth in money supply (M3) moderated from over 20 per cent at the beginning of the financial year to 16.5 per cent on January 15, 2010, reflecting deceleration in bank credit growth. Year-on-year non-food credit growth recovered to over 14 per cent by mid-January 2010 from the trough of around 10 per cent in October 2009. Corporates had better access to non-bank sources of funds which, to a large extent, mitigated the impact of slowdown in bank credit growth. The indicative adjusted non-food credit growth for 2009-10 is now reduced to 16 per cent from the earlier projection of 18 per cent and M3 growth during 2009-10 has been reduced to 16.5 per cent for policy purposes from the earlier projection of 17 per cent.

Financial Markets

Financial markets continued to remain orderly and overnight money market rates remained below or close to the lower bound of the liquidity adjustment facility (LAF) rate corridor as liquidity conditions remained comfortable. Despite large government borrowings, yields remained contained due to lower credit demand, open market operations (OMO) and active liquidity management by the Reserve Bank. Equity markets are behaving in a manner consistent with global patterns.


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

Macroeconomic and Monetary Developments : Third Quarter Review 2009-10... click here

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

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