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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

Risk Factors

While the baseline scenario is comforting, a number of downside risks to growth and upside risks to inflation need to be recognised. These include (i) uncertainty about the pace and shape of the global recovery; (ii) the surge in oil prices, if global recovery is stronger than expected; (iii) uncertainty about the performance of the south-west monsoon in 2010; (iv) sharp increase in capital flows, above the absorptive capacity of the economy, which may complicate exchange rate and monetary management; and (v) accentuation of inflation expectations, if excess liquidity is allowed to persist in the face of a narrowing output gap. In addition, a bigger risk to both short-term economic management and to medium-term economic prospects emanates from the large fiscal deficit. As the recovery gains momentum, it is important that there is coordination in the fiscal and monetary exits. The reversal of monetary accommodation cannot be effective unless there is also a roll back of government borrowings. It is imperative, therefore, that the government returns to a path of fiscal consolidation which can begin with a phased roll back of the transitory components. Beyond that, the Government should indicate a roadmap for fiscal consolidation and also spell out the broad contours of tax policies and expenditure compression that will define this roadmap.

Monetary Policy Stance

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 a pre-crisis level in the Second Quarter Review of October 2009. Against the backdrop of the current global and domestic macroeconomic conditions, outlooks and risks, our policy stance is shaped by three important considerations: (i) First, a consolidating recovery should encourage us to clearly and explicitly shift our stance from ‘managing the crisis’ to ‘managing the recovery’, and it is necessary to carry forward the process of exit further; (ii) Second, even though the inflationary pressures in the domestic economy predominantly stem from the supply side, the consolidating recovery increases the risks of these pressures spilling over into a wider inflationary process; and (iii) Third, strong anti-inflationary measures may undermine the recovery which is yet to fully take hold.

On the basis of the above overall assessment, the stance of monetary policy 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.

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

Monetary Policy Measures

Our Third Quarter Review specifies the following monetary measures:

The cash reserve ratio (CRR) of scheduled banks has been increased by 75 basis points in two stages from 5.0 per cent to 5.75 per cent of their net demand and time liabilities (NDTL). As a result of the CRR increase, about Rs.36,000 crore of excess liquidity will be absorbed from the system.

The policy rates, both the repo rate and the reverse repo rate have been retained at their current levels.

Expected Outcome

We expect three major outcomes from the above policy action:

Reduction in excess liquidity will help anchor inflationary expectations.

The recovery process will be supported without compromising price stability.

The calibrated exit will align policy instruments with the current and evolving state of the economy.

Way Forward

The Reserve Bank will continue to monitor macroeconomic conditions, particularly the price situation closely and take further action as warranted."


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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