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

Operating Procedures of Monetary Policy

14. Now let me turn to two new initiatives – one structural and the other on policy review and communication.

15. The Reserve Bank’s LAF operates in such a manner that as systemic liquidity alternates between surplus and deficit, even at the margin, the overnight call money rate alternates between the reverse repo rate and the repo rate. As the systemic liquidity transits from a uni-directional surplus mode to a bi-directional mode, it will have implications for the effectiveness of monetary transmission. In the context of the changing liquidity dynamics, the operation of the LAF needs to be studied. Accordingly, it is proposed to set up a Working Group to review the current operating procedure of monetary policy of the Reserve Bank, including the LAF.

Mid-Quarter Review of Monetary Policy

16. The second new initiative relates to a more frequent policy review. While our scheduled policy announcements are quarterly, in recent years, there have been several occasions, including March and July 2010, when we had to take off-cycle monetary policy actions. One significant advantage of the quarterly schedule is that it allows us to bring the full range of inputs into the decision-making process. Nevertheless, in a rapidly evolving macroeconomic situation, we need to combine the rigour and comprehensiveness of the quarterly process with the responsiveness and flexibility of more frequent reviews. Accordingly, the Reserve Bank will now undertake mid-quarter reviews roughly at the interval of about one and half months after each quarterly review. As per schedule, mid-quarter reviews will be in June, September, December and March. They will be by way of a press release and will communicate our assessment of economic conditions more frequently, and will provide a rationale for either policy action or maintenance of the status quo. However, the Reserve Bank will have the flexibility, as always, to take swift and pre-emptive policy action, as and when warranted by the evolving macroeconomic developments.

Discussions with Banks

17. Banks welcomed the Reserve Bank’s policy stance. They agreed that the monetary measures announced by the Reserve Bank today were appropriate in light of the current global and domestic balance. They also indicated that credit growth has picked up, though it is yet to become broad-based. Apart from monetary measures, discussions with banks focused on four specific issues viz., (i) liquidity situation and the liquidity adjustment facility (LAF) corridor; (ii) Basel III norms; (iii) credit flows to micro, small and medium enterprises (MSMEs); and (iv) base rate. Banks indicated that the liquidity situation may remain tight for some more time as deposit growth has lagged behind the credit growth. They felt that a narrower LAF corridor will restrict short-term interest rate volatility and improve monetary transmission. Banks mentioned that the impact of Basel III norms on Indian banks will not be significant. However, statutory liquidity ratio (SLR) assets need to be included in the liquidity coverage ratio. Credit portfolio in respect of MSMEs sector of many banks is growing at a rapid rate. The Reserve Bank emphasised that the pace of credit expansion to MSMEs should be sustained and banks should sensitise the frontline managers the importance of lending to MSMEs. Banks indicated that the transition to the base rate has been generally smooth, though there are issues relating to the existing loans."

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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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