Macroeconomic and Monetary Developments in the First Quarter of 2010-11
-Released on July 26, 2010
The Reserve Bank of India on 26th July 2010 released the document Macroeconomic and Monetary Developments: First Quarter Review 2010-11, which serves as a background to the First Quarter Review of Monetary Policy 2010-11 to be announced on July 27, 2010.
The highlights of Macroeconomic and Monetary Developments in the First Quarter of 2010-11 :
Monetary and Liquidity Conditions
The surplus liquidity conditions that prevailed all through 2009-10 started moderating in early 2010-11 in response to the calibrated normalisation of monetary policy by the Reserve Bank.
In June 2010, however, there was severe tightness in liquidity conditions resulting from a sudden and sharp increase in the government cash balances stemming from significantly higher mobilisation under 3G/BWA spectrum auctions.
While mitigating the liquidity pressure, the Reserve Bank persevered with calibrated monetary tightening keeping in view the higher level of inflation.
Reflecting increased demand for credit associated with recovery in growth, non-food credit growth to the private sector remained buoyant.
In the first quarter of 2010-11, the volatility in global markets emanating from concerns about fiscal sustainability in the euro area, spilled over to the Indian markets, particularly the equity market.
Reflecting the tight liquidity conditions in June 2010, interest rates at the short end of the term structure edged up, while medium to long-term yields moderated, in view of the improved fiscal position after 3G/BWA auction revenues.
The banking sector switched over to a new “base rate” system of lending effective July 1, 2010, which is expected to enhance transparency in loan pricing, promote competition in the credit market and also improve the transmission of monetary policy. The base rates set by major public sector banks were in the narrow range of 7.25-8.0 per cent.
Headline WPI inflation has been in double digits since February 2010 and has also become increasingly generalised in every successive month.
Non-food manufacturing inflation accelerated from near zero in November 2009 to 7.3 per cent in June 2010, reflecting the impact of rising input costs, recovering private demand and associated return of pricing power.
Since November 2009, 42 per cent of the overall increase in WPI has resulted from revisions in administered prices and lagged reporting of past increases in prices.
Given the risks to inclusive growth from high inflation, the monetary unwinding that started in October 2009 should continue till inflation expectations are firmly anchored and inflation is brought down.
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