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Annual Policy Statement for the Year 2010-11 click here

Press Statement by Dr. D. Subbarao, Governor-Annual Policy Statement for the Year 2010-11- 20th April 2010

Risk Factors

Let me turn to risk factors. While the indicative projections of growth and inflation for 2010-11 may appear reassuring, we need to recognise the major downside risks to growth and upside risks to inflation:

The prospects of sustaining the global recovery hinge strongly on the revival of private demand which continues to be weak in major advanced economies. While recovery in India is expected to be driven predominantly by domestic demand, a sluggish and uncertain global environment can have an adverse impact.

If the global recovery gains momentum, commodity and energy prices may harden further which could add to inflationary pressures.

Any unfavourable monsoon rainfall pattern could exacerbate food inflation, and could also impose a fiscal burden and dampen rural consumer and investment demand.

The continued accomodative monetary policy in advanced economies is expected to trigger large capital flows into the EMEs, including India. This will pose a challenge for exchange rate and monetary management.

A few comments on the exchange rate management. Our exchange rate policy is not guided by a fixed or pre-announced target or band. Our policy has been to retain the flexibility to intervene in the market to manage excessive volatility and disruptions to the macroeconomic situation. Recent experience has underscored the issue of large and often volatile capital flows influencing exchange rate movements against the grain of economic fundamentals and current account balances. There is, therefore, need to be vigilant against the build-up of sharp and volatile exchange rate movements and its potentially harmful impact on the real economy.

Monetary Policy Stance

The monetary policy response in India since October 2009 has been calibrated to India’s specific macroeconomic conditions. In the wake of the global economic crisis, the Reserve Bank pursued an accommodative monetary policy beginning mid-September 2008. This policy instilled confidence in market participants, mitigated the adverse impact of the global financial crisis on the economy and ensured that the economy started recovering ahead of most other economies. However, in view of the rising food inflation and the risk of it impinging on inflationary expectations, the Reserve Bank began the process of exit from the expansionary monetary policy beginning October 2009.

Our monetary policy stance for 2010-11 has been guided by the following three considerations. First, despite the increase of 25 basis points each in the repo rate and the reverse repo rate in mid-March 2010, our real policy rates are still negative. With the recovery now firmly in place, we need to move in a calibrated manner in the direction of normalising our policy instruments. Second, the current episode of inflation, which was triggered by supply side factors, is developing into a wider inflationary process. Demand side pressures are now clearly discernible. There is, therefore, need to ensure that demand side inflation does not become entrenched. The third consideration that informed our monetary policy stance is the need to balance the monetary policy imperative of absorbing liquidity and ensuring that credit is available to both the Government and the private sector.

Against this background, the stance of monetary policy is intended to:

Anchor inflation expectations, while being prepared to respond appropriately, swiftly and effectively to further build-up of inflationary pressures.

Actively manage liquidity to ensure that the growth in demand for credit by both the private and public sectors is satisfied in a non-disruptive way.

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

Monetary Policy Measures

Our Monetary Policy Statement 2010-11 specifies the following monetary measures:

i) The repo rate has been raised by 25 basis points from 5.0 per cent to 5.25 per cent with immediate effect.

ii) The reverse repo rate has been raised by 25 basis points from 3.5 per cent to 3.75 per cent with immediate effect.

iii) The cash reserve ratio (CRR) of scheduled banks has been raised by 25 basis points from 5.75 per cent to 6.0 per cent of their net demand and time liabilities (NDTL) effective the fortnight beginning April 24, 2010.

Expected Outcome

We expect four major outcomes from the above policy action:

i) Inflation will be contained and inflationary expectations will be anchored.

ii) The recovery process will be sustained.

iii) Government borrowing requirements and the private credit demand will be met.

iv) Policy instruments will be further aligned in a manner consistent with the evolving state of the economy.

Way Forward

The Reserve Bank will continue to monitor macroeconomic conditions, particularly the price situation, closely and take further action as warranted.




Click Here For Annual Policy Statement for the Year 2010-11

Click Here For Macro economic and Monetary Developments : 2009-10

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