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Third Quarter Review of Monetary Policy 2011-12 click here

Highlights - Third Quarter Review of Monetary Policy 2011-12 - Press Statement by Dr. D. Subbarao, Governor

1. "At the outset, on behalf of the Reserve Bank of India, I have pleasure in welcoming all of you to this Third Quarter Review of Monetary Policy for 2011-12.

2. A short while ago, we put out the monetary policy measures accompanying this Review. Based on an assessment of the current macroeconomic situation, we have decided to:

Cut the cash reserve ratio (CRR) of scheduled banks by 50 basis points from 6.0 per cent to 5.5 per cent of their net demand and time liabilities (NDTL). This will be effective the fortnight beginning January 28, 2012.

This reduction in the CRR will inject around Rs 320 billion of primary liquidity into the system.

3. There is no change in the policy interest rate. Accordingly, the repo rate under the liquidity adjustment facility (LAF) remains at 8.5 per cent.

4. Consequently, the reverse repo rate under the LAF, determined with a spread of 100 basis point below the repo rate, will continue at 7.5 per cent, and the marginal standing facility (MSF) rate, determined with a spread of 100 bps above the repo rate, at 9.5 per cent.

Considerations Behind the Policy Move

5. Three major considerations have informed our decision to reduce the CRR.

6. First, growth is decelerating. This reflects the combined impact of several factors: the uncertain global environment, the cumulative impact of past monetary policy tightening and domestic policy uncertainties. While some slowdown in the growth of demand was the expected outcome of our earlier monetary policy actions to contain inflation, at this juncture, risk to growth has increased.

7. Second, even as headline WPI inflation is moderating, it is coming largely from a sharp deceleration in prices of seasonal food items. In respect of other key components, particularly protein-based food items and non-food manufactured products, inflation remains high. Moreover, there are upside risks to inflation from global crude oil prices, the lingering impact of rupee depreciation, and slippage in the fiscal deficit.

8. The third consideration that informed our decision is that liquidity conditions have remained tight beyond the comfort zone of the Reserve Bank. Although the Reserve Bank has conducted open market operations, and injected liquidity of over Rs 700 billion, the structural deficit in the system has increased significantly. This could hurt credit flow to productive sectors of the economy. The large structural deficit in the system presented a strong case for injecting permanent primary liquidity into the system.

Monetary Policy Stance

9. The policy document also spells out the three broad contours of our monetary policy stance. These are:

to maintain an interest rate environment to contain inflation and anchor inflation expectations;

to manage liquidity to ensure that it remains in moderate deficit, consistent with effective monetary transmission;

to respond to increasing downside risks to growth.


10. As has become standard practice by now, we have also given guidance for the period forward.

11. In reducing the CRR, the Reserve Bank has attempted to address the structural pressures on liquidity in a way that is not inconsistent with the prevailing monetary stance. In our two previous guidances, we had indicated that the cycle of rate increases had peaked, and that further actions were likely to reverse the cycle.

12. Based on the current inflation trajectory, including the fact that there is considerable suppressed inflation, it is premature to begin reducing the policy rate. The reduction in the policy rate will be conditioned by signs of a sustainable moderation in inflation. At the same time, the persistence of tight liquidity conditions could disrupt credit flow, and further exacerbate growth risks. In this context, the CRR is the most effective instrument for permanent liquidity injection over a sustained period of time. The CRR reduction can also be viewed as a reinforcement of the guidance that the interest rate cycle has peaked and that future rate actions will be towards lowering the policy interest rate.

13. Having said that, I must emphasise that the timing and magnitude of future rate actions will depend on a number of factors. Policy and administrative actions, which encourage investment that will help ease supply constraints in food and infrastructure, are critical. Initiatives to narrow skill mismatches in labour markets will help ease the pressure on wages. The anticipated fiscal slippage, which is caused largely by high levels of consumption spending by the government, poses a significant threat to both inflation management, and more broadly, to macroeconomic stability.

Expected Outcomes

14. We expect that today’s policy action and the guidance we have given will result in the following three outcomes:

First, liquidity conditions will ease.

Second, downside risks to growth will be mitigated.

Finally, medium-term inflation expectations will remain anchored on the basis of a credible commitment to low and stable inflation.


Macroeconomic and Monetary Developments: Third Quarter Review 2011-12 ...Click Here

Highlights of Third Quarter Review of Monetary Policy 2010-11....Click Here


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