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First Quarter Review of Monetary Policy 2012-13 click here
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First Quarter Review of Monetary Policy Statement 2012-13
-Announced on the 31st July 2012

III. The Policy Stance

37. Keeping in view the slowdown in growth, the Reserve Bank front-loaded the policy rate reduction in April with a cut of 50 basis points. Subsequent developments suggested that even as growth moderated, inflation remained sticky. Keeping in view the heightening risks to inflation, the Reserve Bank decided to pause in the Mid-Quarter Review (MQR) of June 2012, even in the face of slowing growth.

38. Against the backdrop of global and domestic macroeconomic conditions, outlook and risks, the policy stance in this review is shaped by three major considerations.

39. First, after moderating for a short period during December-January, headline WPI inflation edged up again beginning February 2012 and has remained sticky, above 7 per cent, on account of increase in food prices, increase in input costs, and upward revision in prices of some administered items such as coal. Headline inflation has persisted even as demand has moderated and the pricing power of corporates weakened. Non-food manufactured products inflation has also not declined to the extent warranted by the growth moderation. This reflects severe supply constraints and entrenchment of inflation expectations.

40. Second, growth decelerated significantly to 6.5 per cent in 2011-12. Although more recent data suggest some pick up, overall economic activity remains subdued. Importantly, the current growth performance has to be seen in reference to the trend rate of growth in order to assess its inflationary implications. In this context, investment activity has remained subdued over the last two years. External demand has also remained weak due to the slowdown in global growth. Consequently, the post crisis trend rate of growth, which was earlier estimated at 8.0 per cent, has dropped to 7.5 per cent. While the current rate of growth is clearly lower than trend, the output gap will remain relatively small. Under these conditions, demand pressures on inflation can re-emerge quite quickly, exacerbating the existing supply pressures.

41. Third, liquidity conditions play an important role in the transmission of monetary policy signals. Although the situation has eased significantly in the recent period, it is necessary to ensure that liquidity pressures do not constrain the flow of credit to productive sectors of the economy.

42. Against this backdrop, the stance of monetary policy is intended to:

contain inflation and anchor inflation expectations;

support a sustainable growth path over the medium-term; and

continue to provide liquidity to facilitate credit availability to productive sectors.

Macroeconomic and Monetary Developments: First Quarter Review 2012-13 ...Click Here

Highlights of First Quarter Review of Monetary Policy Statement 2012-13....Click Here


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