Monetary Policy Statement for 2011-12 Press Statement by Dr. D. Subbarao, Governor
11. On the basis of the policy stance that I outlined above, and in accordance with changes in operating procedure as set out, we have decided to take the following policy measures:
The repo rate under the liquidity adjustment facility (LAF) has been increased by 50 basis points. Accordingly, it goes up from 6.75 per cent to 7.25 per cent.
As per the new operating procedure, the reverse repo rate under the LAF, determined with a 100 basis point spread below the repo rate, will stand adjusted at 6.25 per cent.
The Marginal Standing Facility (MSF) rate, determined with a spread of 100 basis points above the repo rate, gets calibrated at 8.25 per cent.
The Bank Rate remains at 6.0 per cent.
The cash reserve ratio (CRR) remains unchanged at 6 per cent of NDTL of scheduled banks.
Savings Bank Deposit Interest Rate
12. Let me now turn to the savings bank deposit interest rate on which there has been a lot of media comment over the last week. A week ago, the Reserve Bank put out a discussion paper debating the pros and cons of this proposal. We will review the policy of deregulating the savings bank deposit rate based on the feedback that we get.
13. Pending a final decision on that, we have decided to increase the savings bank deposit interest rate from the present 3.5 per cent to 4.0 per cent with immediate effect.
14. As regards outcomes, the above monetary policy actions are expected to:
First, contain inflation by reining in demand side pressures, and anchor inflation expectations; and
Second, the actions are expected to sustain growth in the medium-term by containing inflation.
15. Let me give you some guidance for the period forward. The Reserve Bank's baseline inflation projections are that inflation will remain elevated, close to the March 2011 level over the first half of 2011-12, before declining. These projections factor in an upward revision of petrol and diesel prices. While the persistence of inflation over the next few months has been incorporated into this policy, the Reserve Bank will continue to persevere with its anti-inflationary stance.
16. I now want to give you an overview of the global and domestic macroeconomic developments that guided our monetary policy stance, and our growth and inflation projections.
17. On the global front, recovery is expected to sustain in 2011 even as it is projected to moderate marginally from its 2010 pace due to the phasing out of the fiscal stimulus, and high oil and other commodity prices. Growth in emerging market economies is also expected to decelerate on account of monetary tightening and rising commodity prices. Theadvanced economies are facing inflation pressures from high commodity prices, while inflation pressures for the emerging market economies are stemming from both strong domestic demand and high commodity prices.
The Indian Economy
18. Turning to the domestic macroeconomic situation, the Indian economy is estimated to have grown by 8.6 per cent last year. Agricultural growth was above trend, following a good monsoon. The index of industrial production (IIP), which grew by 10.7 per cent during the first half of last year, moderated subsequently, bringing down the overall growth for April-February 2010-11 to 7.8 per cent. Particularly significant were the slowdown in capital goods production and investment spending.
19. Going forward, high oil and other commodity prices and the impact of the Reserve Bank’s anti-inflationary monetary stance will moderate growth. Based on the assumption of a normal monsoon, and crude oil prices averaging US$110 a barrel over the full year 2011-12, our baseline projection of real GDP growth for 2011-12, for policy purposes, is around 8 per cent.
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