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Macroeconomic and Monetary Developments in the Second Quarter of 2010-11 -Released on November 01, 2010

Highlights of Macroeconomic and Monetary Developments in the Second Quarter of 2010-11 :

Monetary and Liquidity Conditions

Liquidity conditions became tight in the month of May 2010 consequent to the transfer of liquidity from the markets to the Government in the wake of the 3G/BWA auctions. Since then, liquidity conditions have generally remained in deficit mode, consistence with the monetary policy stance of the Reserve Bank.

To ease excessive frictional liquidity pressure around the end of October 2010, the Reserve Bank provided temporary liquidity comfort to the market.

Policy interest rates have been raised five times since the beginning of March 2010, raising the repo rate by 125 basis points and the reverse repo rate by 175 basis points.

This asymmetric tightening narrowed the policy corridor from 150 basis points to 100 basis points. With repo replacing reverse repo as the operative rate in the LAF, the effective policy interest rate has increased by 275 basis points since March 2010.

Broad money (M3) continues to exhibit subdued growth largely due to the deceleration in the growth of long-term deposits.

With non-food credit growth converging to the 20 per cent growth trajectory indicated in the First Quarter Review of Monetary Policy, banks have scaled up their deposit mobilisation efforts as evident from the higher deposit rates being offered since July 2010.

Financial Markets

In the global financial markets, concerns about sovereign defaults eased, but they were replaced by concerns about risks stemming from the slowdown in global recovery.

The multi-speed recovery around the world and the consequent differential exit from the accommodative monetary stance have strengthened both the push and pull content underlying the significant pick up in private capital flows to EMEs.

In the Indian financial markets, the impact of this trend has been visible in the appreciation of the exchange rate of the rupee against the US dollar and the bullish spikes in equity prices. Housing prices in major cities generally increased.

The transmission of higher policy interest rates and deficit liquidity conditions strengthened across different segments of the financial markets.


The headline inflation has started to soften after staying in double digit for five months up to July 2010.

Inflation in non-food manufactured products, though remains above its medium-term trend, has shown some moderation.

But food inflation remains disconcertingly high despite a normal monsoon. This can be attributed partly to a change in the consumption pattern in favour of protein-rich items, such as, egg, milk, fish and meat where price increases have been high.

Despite moderation in recent months, elevated inflation remains a challenge for monetary policy.


Click Here For Second Quarter Review of Monetary Policy 2010-11

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