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Mid-Quarter Monetary Policy Review: December 2010

December 16, 2010:

Monetary Measures

Reserve Bank of India has announced in the Mid-Quarter Monetary Policy Review to:

retain the repo rate at 6.25 per cent and the reverse repo rate at 5.25 per cent under the Reserve Bank’s liquidity adjustment facility (LAF);

retain the cash reserve ratio (CRR) at 6.0 per cent of net demand and time liabilities (NDTL) of scheduled banks.

Liquidity Measures

It has been decided to:

first, reduce the statutory liquidity ratio (SLR) of scheduled commercial banks (SCBs) from 25 per cent of their NDTL to 24 per cent with effect from December 18, 2010;

second, conduct open market operation (OMO) auctions for purchase of government securities for an aggregate amount of ` 48,000 crore in the next one month, the schedule for which is being issued separately.

The above two measures are expected to inject liquidity on an enduring basis of the order of ` 48,000 crore.

Given the permanent reduction in the SLR by one per cent of NDTL, the additional liquidity support under the LAF announced by the Reserve Bank on November 29, 2010 will now be available up to the extent of 1.0 per cent (instead of 2.0 per cent) of the NDTL of SCBs from December 18, 2010 to January 28, 2011.

Global Economy

There have been significant global and domestic macroeconomic developments since the announcement of the Second Quarter Review of Monetary Policy on November 2, 2010. A slow recovery and persistent unemployment motivated another round of quantitative easing in the US. However, recent data show some signs of improvement, especially in respect of real GDP and consumer confidence, even though the unemployment rate has increased. Although economic recovery has been progressing in Europe, financial stability concerns have resurfaced as the sovereign debt problem spread further. Major emerging market economies (EMEs) continue to experience robust growth.

Significantly, despite the slow recovery and slack capacity in advanced economies, international commodity prices such as oil, food, industrial inputs and metals have risen noticeably in recent weeks. Reflecting the strength of demand and higher commodity prices, inflation has started creeping up in most EMEs.

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RBI Further Relaxes Liquidity Easing Measures; 29 Nov 2010 ....Click Here

Full Text of Second Quarter Review of Monetary Policy 2010-11....Click Here

Monetary Developments in the Second Quarter of 2010-11 ...Click Here

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