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First Quarter Review of the Monetary Policy for 2010-11
Press Statement by Dr. D. Subbarao, Governor

This morning, the Reserve Bank released the First Quarter Review of Monetary Policy for 2010-11 at a meeting of the chief executives of major banks. The important decisions contained in the review were to raise the repo rate from 5.5 per cent to 5.75 per cent and the reverse repo rate from 4 per cent to 4.50 per cent. This asymmetric raise in rates narrows the LAF corridor from 150 basis points to 125 basis points.

Balance of Policy Stance

2. The dominant concern that has shaped the monetary policy stance in this review is high inflation. Even as food price inflation and, more generally, consumer price inflation, have shown some moderation, they are still in double digits. Non-food inflation has risen, and demand side pressures are clearly evident. With growth taking firm hold, the balance of policy stance has to shift decisively to containing inflation and anchoring inflationary expectations.

Global Outlook

3. Since our last policy review in April, the macroeconomic environment has changed significantly. In the aftermath of the Greek sovereign debt crisis and other visible soft spots in Europe and the US, there is renewed uncertainty about the sustainability of the recovery. In contrast, EMEs are witnessing strong growth, driven by rising domestic demand, restocking of inventories and, thus far, recovering global trade. The relatively rapid recovery in EMEs has also been accompanied by higher inflation. Overall, though, there is widespread expectation of a slowdown of the global economy in the second half of 2010.

Indian Economy


4. The macroeconomic developments in India are contrarian to the global trend. We have recovered faster, but our inflation rate has also been higher. The recovery process has consolidated and become more broad-based since April 2010. A big ‘known unknown’ in April 2010 was the outlook on monsoon. That has since become a ‘known known’ in the sense that rainfall so far has been better than during last year, and the crop-wise area sown and the distribution of rainfall offer scope for cautious optimism on the agricultural front.

5. Better farm sector prospects should lead to a pick-up in rural demand. This should give further momentum to the performance of the industrial sector which has been growing firmly. The strength of the recovery is also reflected in the sales and profitability growth of the corporate sector with more investment intentions being translated into action across a range of sectors. While domestic drivers of growth are robust, any slowdown in the global recovery will affect all EMEs, including India.

6. Taking into account the above factors, the projection for real GDP growth for 2010-11 is revised to 8.5 per cent, up from our April policy projection of 8.0 per cent with an upside bias. This upward revision is primarily based on better industrial production and its favourable impact on the services sector while giving due consideration to the global scenario.


7. The developments on the inflation front are, however, worrisome. Let me explain. WPI inflation has been in double digits since February 2010. Primary food articles inflation, despite some moderation, continues to be in double digits. Between November 2009 and June 2010, non-food inflation rose from zero to 10.6 per cent and non-food manufactured inflation from zero to 7.3 per cent. Significantly, non-food items contributed over 70 per cent to WPI inflation in June 2010, suggesting that inflation is now very much generalised. Inflation in terms of all four consumer price indices remains in double digits notwithstanding some decline in recent months.

8. Going forward, the outlook on inflation will be shaped by: (i) the monsoon performance for the remaining period; (ii) movements in global energy and commodity prices, which have been showing distinct signs of softening over the past few weeks; and (iii) potential build-up in demand-side pressures with the strengthening of domestic growth drivers.

9. Taking into account the emerging domestic and external scenario, the baseline projection for WPI inflation for March 2011 has been raised to 6.0 per cent from our April policy projection of 5.5 per cent.

Monetary Aggregates

10. It is expected that even with the higher growth projection, monetary aggregates will evolve along the projected trajectory indicated in the April policy statement. Accordingly, for policy purposes, we have retained the earlier projections of money supply (M3) at 17 per cent and of non-food bank credit growth at 20 per cent.

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

Full Text of First 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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