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

Risk Factors

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

The first risk factor is that if the global recovery falters, the performance of EMEs is likely to be adversely affected, and a widespread slowdown in global trade will have an impact on the Indian manufacturing and service sectors too.

The second risk factor is that an uncertain global situation will significantly reduce the flow of capital into EMEs. Such a slowdown in capital inflows will constrain domestic investment which is critical to achieving and sustaining high growth rates. This could potentially be a problem in India too since our rapid recovery has resulted in a widening of the current account deficit.

It must be recognised though that the risk of capital flows runs both ways. It is quite possible that EMEs, including India, will receive more flows than they need because of accommodative monetary policies of advanced country central banks for an extended period. Large capital inflows above the absorptive capacity of our economy will pose a challenge for monetary and exchange rate management, and also have implications for asset prices. In this scenario, a widening current account deficit will help absorb a larger proportion of the inflows.

The third risk factor is on the inflation front. Softening of inflation in the months ahead is contingent on moderation of food prices which in turn will depend on a balanced spatial andtemporal distribution of rainfall in the remaining period of this monsoon season.

While on risk factors, we must note one important upside. If global growth does not pick up, commodity and energy prices will remain subdued. Furthermore, unutilised global capacity in several sectors will soften the prices of imports and put downward pressure on import substitutes.

Monetary Policy Stance

12. The Reserve Bank began the reversal of its expansionary monetary policy in October 2009 and has calibrated the exit to India’s specific growth-inflation dynamics. Today’s policy action in particular has been informed by three major considerations:

(i) domestic economic recovery is firmly in place and is strengthening;

(ii) there is a need to contain the demand-side inflationary pressures which are clearly evident; and

(iii) despite the increase in the policy rates by 75 basis points cumulatively, it is imperative that we continue in the direction of normalising our policy instruments to a level consistent with the evolving growth and inflation scenario, while taking care not to disrupt the recovery.

13. Our monetary policy actions are expected to:

i) Moderate inflation by reining in demand pressures and inflationary expectations.

ii) Maintain financial conditions conducive to sustaining growth.

iii) Generate liquidity conditions consistent with more effective transmission of policy actions.

iv) Restrict the volatility of short-term rates to a narrower corridor.

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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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