Press Statement by Dr. D. Subbarao, Governor-Third Quarter Review of Monetary Policy 2010-11
-25th January 2011
Monetary Policy Stance
18. The current stance of monetary policy is intended to:
Contain the spill-over of high food and fuel inflation into generalised inflation and anchor inflationary expectations, while being prepared to respond to any further build-up of inflationary pressures.
Maintain an interest rate regime consistent with price, output and financial stability.
Manage liquidity to ensure that it remains broadly in balance, with neither a surplus diluting monetary transmission nor a deficit choking off fund flows.
19. Today’s policy actions are expected to:
Contain the spill-over from rise in food and fuel prices to generalised inflation.
Rein in rising inflationary expectations, which may be aggravated by the structural and transitory nature of food price increases.
Be moderate enough not to disrupt growth.
Continue to provide comfort to banks in their liquidity management operations.
20. Let me now give you some guidance. Current growth and inflation trends clearly warrant that we persist with the anti-inflationary monetary stance. Looking beyond 2010-11, the Reserve Bank expects the domestic growth momentum to stabilise. Inflation is expected to moderate from the first quarter of 2011-12, but several upside risks are already visible. The monetary stance will be determined by how these factors impact the overall inflationary scenario.
Discussions with Banks
21. At today’s meeting with bank CEOs where the policy was released, banks welcomed the Reserve Bank’s policy stance. They shared the Reserve Bank’s concerns about inflation and agreed that the monetary measures and guidance about the stance announced by the Reserve Bank today were appropriate in the current domestic growth-inflation scenario. Apart from monetary measures, discussions with banks centred on: (i) inflation dynamics; (ii) credit growth and asset liability management; and (iii) liquidity management and market borrowing situation. Banks felt that there was a need to step up investment in agricultural infrastructure and focus on better supply chain management. In this context, Indian Banks’ Association (IBA) will prepare a Discussion Paper to examine what banks could do to improve finance to enhance productivity and diversification in the agriculture sector. While welcoming the extension of additional liquidity support facility and the second LAF up to April 8, 2011, banks felt that the liquidity situation was still tight and there was a need to inject primary liquidity by the Reserve Bank. Banks indicated that they would endeavour to align the credit growth rate with that of the deposit growth rate. With a view to addressing asset liability mismatches, banks felt that there was a need to look into innovative solutions for financing the infrastructure sector – a major source of asset liability mismatch. In particular, they suggested that there was a need to incentivise raising of long-term resources by banks through appropriate fiscal measures. The recommendations of the Malegam Sub-Committee on the micro-finance sector were also discussed in the meeting."
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