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

Risk Factors

18. Let me indicate some of the important risks to the growth and inflation outlook.

First, the main downside risk to growth emanates from the prospects of a prolonged, slow and halting recovery in advanced economies which would adversely affect the growth performance of EMEs, including India.

Second, inflationary pressures may accentuate due to the structural component in food inflation while demand side pressures may accentuate due to capacity constraints in many industries and rising global commodity prices.

Third, given the weak recovery, some advanced economies are in the process of resorting to another round of quantitative easing that could trigger capital flows into EMEs, including India. Large capital flows beyond the absorptive capacity of the economy could pose a major challenge for exchange rate and monetary management.

Fourth, the widening of the current account deficit raises concerns given the uncertainty associated with international capital flows.

Fifth, asset prices in India, as in many other EMEs, have risen sharply in a short time which is a cause for concern.

Monetary Policy Stance

19. The current stance of monetary policy is intended to :

Contain inflation and anchor inflationary expectations, while being prepared to respond to any further build-up of inflationary pressures.

Maintain an interest rate regime consistent with price, output and financial stability.

Actively manage liquidity to ensure that it remains broadly in balance, with neither a surplus diluting monetary transmission nor a deficit choking off fund flows.

Expected Outcomes

20. Today’s monetary policy actions are expected to:

Sustain the anti-inflationary thrust of recent monetary actions and outcomes in the face of persistent inflation risks.

Rein in rising inflationary expectations which may be aggravated by the structural nature of food price increases.

Be moderate enough not to disrupt growth.

21. Let me reiterate that the exit from expansionary monetary policy since October 2009 has been calibrated on the basis of India’s specific growth-inflation dynamics in the broader context of persistent global uncertainty. The Reserve Bank will continue to closely monitor both global and domestic macroeconomic conditions. We will take action as warranted with a view to mitigating any potentially disruptive effects of lumpy and volatile capital flows and sharp movements in domestic liquidity conditions, consistent with the broad objectives of price and output stability.

22. Based purely on current growth and inflation trends, the Reserve Bank believes that the likelihood of further rate actions in the immediate future is relatively low. However, in an uncertain world, we need to be prepared to respond appropriately to shocks that may emanate from either global or domestic environment.

Developmental and Regulatory Polices

23. Let me now turn to developmental and regulatory issues. The thrust of the regulation by the Reserve Bank in recent years has not only been on strengthening the financial system, but also on developing financial markets, promoting financial inclusion, improving credit delivery, especially to the SME sector, improving customer service and strengthening the payment and settlement systems. The Reserve Bank, therefore, will continue to pursue reforms in these areas so as to enhance the efficiency and stability of the financial system.

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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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