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Second Quarter Review of the Monetary Policy for 2011-12
-Announced on the 25th October 2011 by Dr. D. Subbarao, Governor, Reserve Bank of India

From a macroeconomic perspective, the last quarter witnessed significant developments, both globally and domestically. Growth momentum in the US and the euro area economies has weakened. In the euro area, macroeconomic prospects are intimately tied in to its ability to credibly resolve its sovereign debt and financial sector problems. In turn, trade and financial linkages increase the risks of euro area instability transmitting through to emerging market economies (EMEs), which have already experienced large volatility in their financial markets, particularly their currency markets. Significantly, while the prices of many commodities declined over the quarter, crude oil prices remained relatively firm. The impact of this on commodity importing EMEs has been exacerbated by currency depreciation.

2. Amidst this turbulence and heightened uncertainty, the Indian economy is clearly seeing slowing growth. This moderation is, in part, due to the anti-inflationary stance of monetary policy, a necessary pre-condition to bring inflation down. But there are also other factors responsible for the moderation in growth, particularly for the significant slowdown in investment activity, such as policy and regulatory matters. These issues clearly have adverse implications for sustaining rapid growth.

3. Of larger concern is the fact that even with the visible moderation in growth, inflation has persisted. Reassuringly, momentum indicators are turning down, consistent with the Reserve Bank’s projections that inflation rate will decline significantly in December and continue on that trajectory into 2012-13.

4. The policy stance and guidance in this Review are shaped by the need to balance concerns about persistent inflation and moderating growth. Recent policy actions have been firmly based on the proposition that sustained growth over a long period of time is compatible only with low and stable inflation. Persistently high inflation strongly influences expectations adversely and, through them, consumption and investment decisions. Changing the policy stance when inflation is still far above the tolerance level entails risks to the credibility of the Reserve Bank’s commitment to low and stable inflation. However, growth risks are undoubtedly significant in the current scenario, and these need to be given due consideration.

5. This policy review is set in the context of the above global and domestic concerns. It should be read and understood together with the detailed review in Macroeconomic and Monetary Developments releasedyesterday by the Reserve Bank.

6. This Statement is organised in two parts. Part A covers Monetary Policy and is divided into four sections: Section I provides an overview of global and domestic macroeconomic developments; Section II sets out the outlook and projections for growth, inflation and monetary aggregates; Section III explains the stance of monetary policy; and Section IV specifies the monetary measures. Part B covers Developmental and Regulatory Policies and is organised in six sections: Interest Rate Policy (Section I), Financial Markets (Section II), Financial Stability (Section III), Credit Delivery and Financial Inclusion (Section IV), Regulatory and Supervisory Measures for Commercial Banks (Section V) and Institutional Developments (Section VI).

Part A. Monetary Policy

I. The State of the Economy ... Click Here

II. Outlook and Projections ... Click Here

III. The Policy Stance... Click Here

IV. Monetary Measures... Click Here

Part B. Developmental and Regulatory Policies

61. This part of the Statement reviews the progress in various developmental and regulatory policy measures announced by the Reserve Bank in the recent policy statements and also sets out new measures.

62. In an increasingly globalised world and closely integrated financial markets, shocks in any one part of the world are now quickly transmitted to the rest of the world. This was clearly evident during the global financial crisis of 2008, and now with the re-emergence of global financial risks. This inter-connectedness has reinforced the significance of financial stability for the macroeconomic stability. Financial stability has been one of the key objectives of the Reserve Bank’s policy. Even as the financial system in India emerged unscathed from the global financial crisis, there was still a need to further strengthen the financial sector, drawing lessons from the global financial crisis.

63. In the banking sector, the focus of the Reserve Bank’s regulatory policies in the recent period has been to strengthen capital and liquidity norms and macroprudential framework so that it remains resilient. The thrust of various regulatory measures in the financial markets is to make them more deep and liquid. The Reserve Bank has also been strengthening the regulation of systemically important non-banking financial companies.

64. The Reserve Bank has also been playing a developmental role, although the focus of developmental activity has changed from time to time. In the recent period, concerted attention has been paid to promote financial inclusion. In addition, the promotion of secure and efficient technology based services remains on the Reserve Bank’s priority agenda.

I. Interest Rate Policy ... Click Here

II. Financial Markets ... Click Here

III. Financial Stability... Click Here

IV. Credit Delivery and Financial Inclusion... Click Here

V. Regulatory and Supervisory Measures for Commercial Banks... Click Here

VI. Institutional Developments... Click Here

Click Here For Press Statement by Dr. D. Subbarao, Governor on Second Quarter Review

An analytical review of macroeconomic and monetary developments: Second Quarter Review 2011-12, was issued on 24th October 2011, which serves as a background to the Second Quarter Review of Monetary Policy 2011-12. ...Click Here

Highlights of First Quarter Review of the Monetary Policy for 2011-12....Click Here

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