Mid-Quarter Review of Monetary Policy 2012-2013
-Announced on the 18th June 2012 by Dr. D. Subbarao, Governor, Reserve Bank of India
12. Although money supply (M3) growth has been slightly under the projected trajectory, credit growth has moved above the projected rate. Notably, the widening wedge between deposit growth and credit growth is intensifying liquidity pressures. However, the open market operations (OMOs) have substantially eased liquidity conditions, as is reflected in the stabilization of the overnight call money rate close to the policy repo rate. To further augment liquidity and encourage banks to increase credit flow to the export sector, the Reserve Bank has increased the limit of export credit refinance from 15 per cent of outstanding export credit of banks to 50 per cent, which will potentially release additionally liquidity of over `300 billion, equivalent to about 50 basis points reduction in the CRR.
13. During 2011-12, the widening CAD, in the face of worsening global economic and financial conditions, exerted downward pressure on the rupee. As capital inflows continue to remain muted, the rupee has further depreciated since April. Prospects for increasing capital inflows depend on both global conditions, particularly a credible resolution of the euro area situation, and an improvement in the domestic investment climate.
14. Management of liquidity remains a priority. Even as the liquidity situation converges to the comfort zone, the Reserve Bank will continue to use OMOs as and when warranted to contain liquidity pressures.The evolving growth-inflation dynamic will continue to influence the Reserve Bank's stance on interest rates. Core inflation has moderated, reflecting demand conditions and lower pricing power. However, both headline and retail inflation rates are rising, which have a bearing on inflation expectations. Future actions will depend on a continuing assessment of external and domestic developments that contribute to lowering inflation risks.
15. Management of liquidity remains a priority. Even as the liquidity situation converges to the comfort zone, the Reserve Bank will continue to use OMOs as and when warranted to contain liquidity pressures.
16. Finally, recognizing that the global situation is turbulent, the Reserve Bank stands ready to use all available instruments and measures to respond rapidly and appropriately to any adverse developments.
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