Highlights - Third Quarter Review of Monetary Policy 2011-12 - Press Statement by Dr. D. Subbarao, Governor
Liquidity and Monetary Conditions
29. Liquidity management has been a major challenge for the Reserve Bank during this year. Liquidity conditions, which have generally remained in deficit, tightened further beginning the second week of November 2011, partly reflecting RBIís forex market operations and advance tax outflows around mid-December. The Reserve Bank is on record having said that it would like the LAF window to be in modest deficit, in the range of +/- 1 per cent of NDTL, which works out to around Rs 600 billion. Current levels of access to LAF, at about Rs1,200 billion, are way beyond this band. To ease the tightness in liquidity, and consistent with its monetary policy stance, the Reserve Bank conducted open market operations (OMOs) aggregating to over Rs 700 billion during November 2011-mid January 2012.
30. While broad money supply growth during the current year has evolved along the projected trajectory of 15.5 per cent, non-food credit growth has now slipped below the indicative trajectory of 18 per cent. Keeping in view the increased government borrowings and the slowdown in private credit demand, M3 growth projection for 2011-12 has been retained at 15.5 per cent, while non-food credit growth has been scaled down to 16.0 per cent. These numbers, as always, are indicative projections and not targets.
Forex Market Developments
31. Before I turn to the risk factors, let me briefly touch upon the developments in the foreign exchange market, which remained under pressure in the third quarter of 2011-12, reflecting adverse global sentiments and moderation in capital inflows. The Reserve Bank took a number of steps to stimulate capital inflows and curb speculation, besides also intervening in the market, consistent with our policy of containing volatility and preventing disruptive movements. The Reserve Bank continues to closely monitor developments in the external sector and their impact on the exchange rate. We will take action, as and when appropriate.
32. Finally, let me turn to the risks to our projections of growth and inflation for 2011-12. We have listed seven of these.
first, sovereign debt concerns in the euro area pose a major downside risk to the overall growth outlook.
the second major risk emanates from the slowdown of capital flows in the face of a widening current account deficit.
third, global energy prices continue to pose a risk to growth and inflation due to geo-political factors and the global macroeconomic situation.
fourth on our list of risks is that there are signals of increasing risk aversion by banks, which could adversely affect credit flow to productive sectors of the economy.
fifth, inflation in respect of protein-based items remains high due to structural imbalances. In the absence of appropriate supply responses, risk to food inflation will continue to be on the upside.
Next, there is a large element of suppressed inflation as domestic prices of some administered products do not reflect the underlying market conditions. Revision in domestic administered prices will add to inflationary pressures, although I should note that such revisions are necessary to maintain the balance between supply and demand.
finally, the fiscal deficit of the government could potentially crowd out credit to the private sector. Moreover, slippage in the fiscal deficit has been adding to inflationary pressures and it continues to be a risk for inflation.
33. Let me conclude by briefly reflecting on the critical area of fiscal-monetary policy coordination. Considering the egregious implications of large fiscal deficits, which are well-known, there is an urgent need for decisive fiscal consolidation, which will shift the balance of aggregate demand from public to private, and from consumption to capital formation. This is critical to yielding the space required for lowering rates without the imminent risk of resurgent inflation. The forthcoming Union Budget must exploit the opportunity to begin this process in a credible and sustainable way."
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RBI CREDIT AND MONETARY POLICIES (1999-2012)