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Annual Policy Statement for the Year 2011-12 click here

Press Statement by Dr. D. Subbarao, Governor- Monetary Policy Statement for 2011-12 (17th April 2012)


2. A short while ago, we put out our annual Monetary Policy Statement. Based on an assessment of the current macroeconomic situation, we have decided to:

reduce the repo rate under the liquidity adjustment facility (LAF) by 50 basis points. The repo rate will accordingly drop from 8.5 to 8.0 per cent.

3. Consequent to this, the reverse repo rate under the LAF, determined with a spread of 100 basis points below the repo rate, gets calibrated to 7.0 per cent. Similarly, the marginal standing facility (MSF) rate, which has a spread of 100 bps above the repo rate, stands adjusted to 9.0 per cent.

4. In order to provide greater liquidity cushion, we have also decided to raise the borrowing limit of scheduled commercial banks under the marginal standing facility (MSF) from one per cent to two per cent of their net demand and time liabilities (NDTL).

5. These changes have come into effect immediately after the announcement.

Considerations Behind the Policy Move

6. The decision to ease the monetary policy has been informed by two broad considerations.

7. First, growth decelerated significantly to 6.1 per cent in the third quarter of last year, although it is expected to have recovered moderately in the fourth quarter. Based on current assessment, the economy is clearly operating below its post-crisis trend.

8. The second consideration that shaped the policy decision is the decline in inflation. Headline WPI inflation which remained above 9 per cent for nearly two years has moderated significantly to below 7 per cent by March 2012. More importantly, non-food manufactured products inflation has dropped from a high of 8.4 per cent in November 2011 to 4.7 per cent in March 2012, actually coming below 5 per cent for the first time in two years.

Monetary Policy Stance

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

first, to adjust the policy rates to levels consistent with the current growth moderation;

second, to guard against risks of demand-led inflationary pressures re-emerging; and

third, to provide greater liquidity cushion to the financial system.


10. As in the past, we have also given guidance for the period forward.

11. The reduction in the repo rate is based on an assessment of growth having slowed below its post-crisis trend rate which, in turn, is contributing to a moderation in core inflation. However, it must be emphasised that the deviation of growth from its trend is modest. At the same time, upside risks to inflation persist. These considerations inherently limit the space for further reduction in policy rates.

12. Moreover, if subsidies are not contained as indicated in the Union Budget last month, demand pressures will persist, and will further reduce whatever space there is for monetary easing. Revisions in administered prices may adversely impact headline inflation. But I would like to underscore that the appropriate monetary policy response to this should be based on whether the higher prices translate into generalized inflationary pressures. The likelihood of a pass-through of higher administered prices to generalised inflation depends on the strength of the pricing power in the economy. The pricing power is currently abating, but the risk of a pass-through cannot be ignored altogether. Overall, from the perspective of vulnerabilities emerging from the fiscal and current account deficits, it is imperative for macroeconomic stability that administered prices of petroleum products are increased to reflect their true costs of production.

13. Liquidity management posed a major challenge for much of last year. However, liquidity conditions have eased in recent weeks, and are now steadily moving towards the comfort zone of the Reserve Bank. This is reflected in the decline in banks’ borrowings from the LAF and the behaviour of money market rates. The increase in the MSF limit to banks that we just announced should provide additional liquidity comfort. However, should the situation change, appropriate and proactive steps will be taken with the objective of restoring comfort zone conditions.

Expected Outcomes

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

First, growth will stabilise around its current post-crisis trend.

Second, risks of inflation and inflation expectations re-surging will be contained.

Finally, the liquidity cushion available to the system will be enhanced.

Global and Domestic Developments

15. As always, our decision has been based on a careful assessment of the global and domestic macroeconomic situation. Let me begin with our assessment of the global economy.

Global Economy

16. Concerns about a crisis in the euro area have abated somewhat since the Reserve Bank’s Third Quarter Review in January 2012. The US economy continues to show signs of modest recovery. Large scale liquidity infusions by the European Central Bank have significantly reduced the stress in global financial markets. However, a sustainable solution to the euro area debt problem is yet to emerge. Recent developments, for example in Spain, indicate that the euro area sovereign debt problem will continue to weigh on the global economy.

17. Growth also slowed down in emerging and developing economies (EDEs) reflecting the combined impact of monetary tightening and slowdown in global growth. And, amidst all these, international crude oil prices have risen by about 10 per cent since January and show signs of persisting at current levels.


Click Here For Annual Policy Statement for the Year 2012-13

Click Here For Macro economic and Monetary Developments : 2011-12

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