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First Quarter Review of its Monetary Policy 2009-2010
-Announced on the 28th July 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 First Quarter Review of its Monetary Policy 2009-2010

The global economy is showing incipient signs of stabilisation, albeit not recovery. The pace of decline in economic activity in several major advanced economies has slowed, frozen credit markets have thawed and equity markets have begun to recover. Recent months have witnessed industrial activity reviving in a number of emerging market economies (EMEs) such as China, Korea, Brazil and India. Notwithstanding some positive signs, the path and the time horizon for global recovery remain uncertain. Consumption demand remains subdued as unemployment levels have risen. Business and consumer confidence are yet to show definitive signs of revival. Global trade, according to the International Monetary Fund (IMF), is projected to shrink by over 12 per cent in 2009; private capital flows are also expected to decline. The continuing process of balance sheet adjustment by both households and businesses is inhibiting recovery in many economies. Reflecting these several uncertainties, the IMF, in its latest World Economic Outlook (WEO) update released in July 2009, has further revised downwards the global growth forecast for 2009 to (-)1.4 per cent from its April 2009 forecast of (-)1.3 per cent.

2. The crisis, which affected the global financial system and engulfed most countries of the world, had all the ingredients for a severe disruption of the world economy on the scale of the Great Depression. However, it was mitigated by bold, large and decisive actions taken in concert by governments and central banks in each country, and which came to be increasingly co-ordinated across countries. Consequently, while the financial sector appears to be stabilising, economic recession in the real sector persists.

3. The Indian economy experienced a significant slowdown in 2008-09 in comparison with the robust growth performance in the preceding five years, largely due to the knock-on effect of the global financial crisis. The worst hit has been the export sector, which has been recording negative growth since October 2008. This, in turn, impacted the manufacturing sector. Investment demand was also dented by the decline in corporate profitability and increased uncertainties about future prospects. Private consumption decelerated significantly. The services sector, which has been the main driver of growth for more than a decade, also slowed down. The financial sector, however, remained relatively unaffected despite the severe stress caused by the global deleveraging process, which triggered capital outflows in the second half of 2008-09.

4. Quick and aggressive policy responses both by the Government and the Reserve Bank mitigated the adverse impact of the global financial crisis. The large domestic demand bolstered by government consumption, provision of forex and rupee liquidity coupled with sharp cuts in policy rates, a sound banking sector and well-functioning financial markets helped cushion the economy from the worst impact of the crisis. There are now signs of an upturn in industrial production and revival of credit demand, though the delayed

5. This First Quarter Review of Monetary Policy for 2009-10 is thus set in the context of a stabilising global economy and gradually recovering domestic economy. It is organised in three sections. Section I provides an assessment of the Macroeconomic and Monetary Developments; Section II delineates the Stance of Monetary Policy; and Section III sets out the Monetary Measures. This review should be read and understood together with the detailed review of Macroeconomic and Monetary Developments released yesterday.

This Review consists of three sections:

I. Assessment of Macroeconomic and Monetary Developments... Click Here

II. Stance of Monetary Policy... Click Here

III. Monetary Measures... 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 First Quarter Review of its Annual Policy Statement for 2009-10

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

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