Second Quarter Review of its Monetary Policy 2009-2010
-Announced on the 27th October 2009 by Dr. D. Subbarao, Governor, Reserve Bank of India
Dr. D. Subbarao's, Governor, in a meeting with Chief Executives of major commercial banks today presented the Second Quarter Review of its Monetary Policy 2009-2010
The global economy has begun to recover from the deep recession set off by the financial crisis. This recovery is underpinned by output expansion in emerging market economies (EMEs), particularly those in Asia. The pace and shape of recovery, however, remain uncertain.
2. In fact, the global economic outlook presents a mixed picture. On the positive side, world output, as per the International Monetary Fund (IMF) estimates, has expanded by 3 per cent in the second quarter (quarter-on-quarter, annualised), manufacturing activity has picked up, trade is recovering, financial market conditions are improving, and risk appetite is returning. A sharp recovery in equity markets has enabled banks to raise capital to repair their balance sheets. In the US, home prices appear to be stabilising. Capital flows to EMEs have resumed. Most importantly, the anxiety and nervousness that pervaded the financial markets during the height of the crisis are being replaced by a sense of calm.
3. On the negative side, there are concerns that the recovery is fragile. The second quarter improvement is essentially the outcome of policy-induced stimulus. Going forward, the impact of the stimulus will fade away and inventory rebuilding may lose momentum. In advanced economies, private consumption remains constrained by continuing job losses, sluggish income growth and dented confidence. Even as output is recovering, unemployment is expected to increase to over 10 per cent in the US and the Euro area. Investment is also expected to remain weak due to ruptured balances sheets, excess capacity and financing constraints. Bank collapses are continuing. World trade remains below its year ago level, notwithstanding recent quarter-on-quarter improvement.
4. Reflecting this mixed trend which has a small bias towards the positive, the IMF projected, in its October 2009 World Economic Outlook (WEO), that the rate of contraction of the world economy in 2009 will be 1.1 per cent, an upward revision from its projection of a contraction of 1.4 per cent made in its July 2009 WEO. However, the IMF expects the ensuing global recovery to be slow. In its latest Economic Outlook (September 2009), the Organisation for Economic Co-operation and Development (OECD) projects the pace of activity to remain weak well into 2010 on account of numerous headwinds. On balance, while global economic prospects have improved since the First Quarter Review in July 2009, uncertainties remain about the pace and sustainability of economic recovery.
5. The Indian economy, which slowed down significantly during the second half of 2008-09, largely due to the knock-on effect of the global financial crisis, has begun to stabilise. This is despite the continuing contraction in exports and the worst drought since 1972. Performance of the industrial sector has improved markedly in recent months. Both domestic and external financing conditions are on the upturn. Capital inflows have revived. Activity in the primary capital market has picked up and funding from non-bank domestic sources has eased. Liquidity conditions have remained easy and interest rates have softened in the money and credit markets.
6. At the same time, there are several negative indications. Private consumption demand is yet to pick up. Agricultural production is expected to decline due to lower Kharif foodgrain production. Services sector growth remains below trend. Bank credit growth continues to be sluggish. There are also clear signs of rising inflation stemming largely from the supply side, particularly from food prices.
7. This Second Quarter Review of Monetary Policy for 2009-10 is thus set against the backdrop of incipient signs of recovery in the global economy and improving prospects for the domestic economy. The Review is organised in two parts. Part A covers Monetary Policy andis divided into three sections. Part B covers the Developmental and Regulatory Policies and is organised into seven sections. Part A of this Statement should be read and understood together with the detailed review in Macroeconomic and Monetary Developments released yesterday.
Part A. Monetary Policy
I. Macroeconomic and Monetary Developments... Click Here
II. Stance of Monetary Policy... Click Here
III. Monetary Measures... Click Here
Part B. Developmental and Regulatory Policies
103. The global financial crisis raised issues that we thought were settled and reopened questions that we thought had been answered. It also pointed to the egregious policies and practices in financial sector regulation and supervision. Reflecting the lessons of the crisis, there is now active debate and discussion at the global level on reforming the regulatory structures and supervisory processes. This is expected to be a continuous process with reform packages being agreed upon and finalised in a modular fashion on a regular basis over the next couple of years.
104. India has been less affected by the crisis than most other countries because of our relatively cautious policies, prudent regulation and effective supervision. Nonetheless, there are lessons from the crisis for India too, which include: (i) further strengthening regulation at the systemic and institutional levels; (ii) making our supervision more effective and value adding; and (iii) improving our skills in risk management. India has been an active participant at the global discussions. The task for us will be to reflect our point of view in the global debate and adapt the global policies and guidelines to the Indian situation on a dynamic basis. A task that the Reserve Bank has all along been performing but is now explicitly defined is monitoring and ensuring financial stability. Furthermore, we need to actively pursue the challenge of financial inclusion.
105. Reform is a continuous process. Over the last several years, the Reserve Bank has endeavoured to make reforms a consultative and participative endeavour. It is now standard practice for the Reserve Bank to consult stakeholders before policy reviews, seek comments from experts, place draft policy proposals on its website for feedback and to disseminate policies widely. We will continue to improve these practices.
106. A synopsis of the action taken and status of past policy announcements together with a listing of fresh policies is set out below.
I. Financial Stability... Click Here
II. Interest Rate Policy... Click Here
III. Financial Markets... Click Here
IV. Credit Delivery Mechanism and other Banking Services... Click Here
V. Financial Inclusion... Click Here
VI. Regulatory Measures for Commercial Banks... Click Here
VII. Institutional Developments... Click Here
An analytical review of macroeconomic and monetary developments was issued a day in advance as a supplement to this Review, providing the necessary information and technical analysis ... Click Here
Click Here For Highlights of Second Quarter Review of its Annual Policy Statement for 2009-10