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Second Quarter Review of the Monetary Policy for 2010-11
Press Statement by Dr. D. Subbarao, Governor-2nd November 2010

This morning, the Reserve Bank released its Second Quarter Review of Monetary Policy for 2010-11. At the heart of the policy was a further increase in the repo and reverse repo rates by 25 basis points each. Accordingly, the repo rate stands raised to 6.25 per cent and the reverse repo rate to 5.25 per cent. The cash reserve ratio (CRR) has been left unchanged at 6 per cent of net demand and time liabilities (NDTL) of banks.

2. With this increase, since we started reversing the monetary policy stance in March 2010, the repo rate has increased by 150 basis points and the reverse repo by 200 basis points.

Considerations Behind Policy Move

3. As always, we had taken into account both global and domestic macroeconomic situation in calibrating this policy move. In particular, we were guided by three considerations.

Domestic growth drivers are robust which should help absorb to a large extent the negative impact of any slowdown in global recovery.

Inflation and inflationary expectations remain high as both demand side and supply side factors are at play. Given the spread and persistence of inflation, demand-side inflationary pressures need to be contained and inflationary expectations anchored.

Even though a liquidity deficit is consistent with our anti-inflation stance, it needs to be contained within a reasonable limit to ensure that economic activity is not disrupted.

Global Outlook

4. To start with, a brief comment on the global economy. The fragile and uneven nature of the recovery and large unemployment in advanced economies raise concerns about the sustainability of the global turn around. The slowing momentum of recovery has prompted the central banks of some advanced economies to initiate (or consider initiating) a second round of quantitative easing to further stimulate private demand. While the ultra loose monetary policy of advanced economies may benefit the global economy in the medium-term, in the short-term it will trigger further capital inflows into emerging market economies (EMEs) and put upward pressure on global commodity prices.

Indian Economy


5. Turning to domestic outlook, the economy is operating close to the trend growth rate, driven mainly by domestic factors. The normal South-West monsoon and its delayed withdrawal have boosted the prospects of both kharif and rabi agricultural production which should also stimulate rural demand. Most industrial and service sector indicators also point towards sustained growth.

6. Taking into account the good performance of the agriculture sector, and a range of indicators of industrial production and service sector activity, the baseline projection of real GDP growth for 2010-11, for policy purposes, is retained at 8.5 per cent.


7. Let me now move to the vital issue of inflation conditions. Notwithstanding some moderation in recent months, headline inflation remains significantly above its medium-term trend, and well above the comfort zone of the Reserve Bank. Food inflation has not shown the expected post-monsoon moderation and has remained persistently elevated for over an year now, reflecting in part the structural demand-supply mismatches in several commodities. This has elevated inflation expectations. The risks of expectations spilling over into prices of other commodities are significant when the economy is growing close to trend. That could potentially offset the recent moderation.

8. Even as non-food manufacturing inflation has moderated, it remains above its medium-term trend. The new WPI series released in September 2010 is a better representative of commodity price levels with an updated base (2004-05=100) and wider coverage of commodities. When we compare the old and new WPI series, inflation at the aggregate level over the medium-term is similar under both series, but there are differences at a disaggregated level. Inflation in primary articles, especially food articles, in the new series has been significantly higher than in the old series, whereas for manufactured products, it has been somewhat lower.

9. Going forward, the inflation outlook will be shaped by three factors: (i) the evolution of food price inflation; (ii) global commodity prices; and (iii) demand pressures stemming from sustained growth amidst tightening capacity constraints in many industries.

10. On balance, inflation is expected to moderate from the present elevated level, reflecting in part, some easing of supply constraints and concerted policy action. In its July Review, the Reserve Bank made a baseline projection of WPI inflation for March 2011 of 6 per cent under the old series of WPI. The baseline projection of WPI inflation for March 2011 has been placed at 5.5 per cent under the new series. This is equivalent to 6 per cent under the old series. Effectively, this means that the Reserve Bank’s inflation projection remains unchanged from that made in its July 2010 Review.

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An analytical review of macroeconomic and monetary developments: Second Quarter Review 2010-11, was issued on 26th July 2010, which serves as a background to the Second Quarter Review of Monetary Policy 2010-11. ...Click Here

Full Text of Second Quarter Review of the Monetary Policy for 2010-11....Click Here

Mixed reactions from Banks, Economists, India Inc on RBI Annual Policy ....Click Here

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