RBI's Second Quarter Review of Monetary Policy 2012-13 - Announced on 30th Oct 2012 by Dr. D. Subbarao, Governor, Reserve Bank of India
Over the last quarter, policymakers around the world have confronted increasingly difficult challenges. Globally, even as the growth momentum has slowed, governments have had to manage the balance between fiscal consolidation and growth stimulus amidst visible signs that the two objectives are in conflict with each other. As the advanced economies (AEs) deal with these tensions and global demand conditions weaken, emerging and developing economies (EDEs) are also slowing down.
2. Liquidity infusions by central banks in AEs during the quarter have contributed to some stability in global financial markets. These measures cannot, however, substitute for robust structural solutions that can return the AEs to the path of recovery. At this stage, growth risks have risen and could well overwhelm the positive effects of enhanced liquidity. Moreover, with commodity prices still at elevated levels, notwithstanding some muted softening recently, risks of liquidity-driven price increases remain significant. Even as this process moves forward, the months ahead will be a period of heightened uncertainty for the global economy.
3. Amidst this global slowdown and uncertainty, the Indian economy remains sluggish, held down by stalled investment, weakening consumption and declining exports. However, recent policy initiatives undertaken by the Government have begun to dispel pervasive negative sentiments. As the measures already announced are implemented and further reforms are initiated, they should help improve the investment climate further.
4. Meanwhile, the persistence of inflationary pressures even as growth has moderated, remains a key challenge. In this respect, India is an exception to the global trend, which underscores the role of domestic structural factors. Of particular concern is the stickiness of core inflation, mainly on account of supply constraints and the cost-push of rupee depreciation. Consequently, managing inflation and inflation expectations must remain the primary focus of monetary policy. A central premise of monetary policy is that low and stable inflation and well-anchored inflation expectations contribute to a conducive investment climate and consumer confidence, which is key to sustained growth on a higher trajectory in the medium-term.
5. Accordingly, over the past few quarters, monetary policy had to focus on inflation, even as growth risks have increased. As recent policy initiatives by the Government start yielding results in terms of revitalising activity, they will open up space for monetary policy to work in concert to stimulate growth. However, in doing so, it is important not to lose sight of the primary objective of managing inflation and inflation expectations.
6. 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 released yesterday by the Reserve Bank.
Part A. Monetary Policy
I. The State of the Economy Read full text
II. Outlook and Projections Read full text
III. The Policy Stance Read full text
IV. Monetary Measures Read full text
Part B. Development and Regulatory Policies
58. This part of the Statement reviews the progress on various developmental and regulatory policy measures announced by the Reserve Bank in recent policy statements and also sets out new measures.
59. Since the Monetary Policy Statement of April 2012, risks to global financial stability have increased, despite some improvement in markets associated with exceptional liquidity operations. In advanced economies, significant fiscal challenges could morph into broader macro-financial concerns. For emerging and developing economies (EDEs), financial stability risks are embedded in potential spillovers, apart from those associated with domestic challenges of managing slowdown in growth, while countering lingering inflationary pressures in some. These unsettled conditions have nevertheless spurred movements towards globalised regulatory reforms intended to make financial systems safer, less complex and more transparent, and financial institutions less leveraged, better capitalised and thus able to effectively manage various risks. Many of these reforms are at various stages of implementation.
60. In India, in the face of a challenging global environment and a difficult growth-inflation dynamic, developmental and regulatory policies have focused on building a sound, efficient and vibrant financial system that ensures the effective provision of financial services to the widest sections of society. Financial sector reforms have moved in step with evolving international best practices, but with a country-specific orientation. Accordingly, financial market development, credit quality, credit delivery, customer service and financial inclusion within a participative and consultative approach with involvement of all stakeholders have been pursued.
61. This review of Developmental and Regulatory Policies for SQR of Monetary Policy 2012-13 focuses on certain key areas while assessing the progress made on the measures instituted in recent policy statements: reviewing interest rate policies and products; carrying forward financial market development and strengthening the market infrastructure, including payment and settlement systems; further improving credit delivery and financial inclusion; expanding customer service initiatives; upgrading the regulatory and supervisory framework in terms of progress towards Basel III, risk based supervision (RBS), non-performing assets (NPAs) management/restructuring and resolution frameworks; and strengthening currency management.
I. Interest Rate Policy Read full text
II. Financial Markets Read full text
III. Financial Stability Read full text
IV. Credit Delivery and Financial Inclusion Read full text
V. Regulatory and Supervisory Measures Read full text
VI. Institutional Developments Read full text
Mid-Quarter Review of Monetary Policy 2012-13
56. The next Mid-Quarter Review of Monetary Policy for 2012-13 will be announced through a press release on Tuesday, December 18, 2012.
Third Quarter Review of Monetary Policy 2012-13
57. The Third Quarter Review of Monetary Policy for 2012-13 is scheduled for Tuesday, January 29, 2013.
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