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First Quarter Review of the Monetary Policy for 2011-12
-Announced on the 26th July 2011 by Dr. D. Subbarao, Governor, Reserve Bank of India

The Reserve Bank’s Annual Policy Statement of May 3, 2011 highlighted several risk factors to the growth-inflation outlook. Many of these risks have materialised. On the global front, the sovereign debt problems that have beset the euro area over the past year now threaten larger economies in the region. In the US, concerns over a sovereign default loom over financial markets, with potentially disruptive consequences for global capital flows. Japan is dealing with the challenges of recovering from the impact of the tsunami amidst deeper recessionary tendencies.

2. In striking contrast to advanced economies, emerging market economies (EMEs) have generally been dealing with rising inflation, caused by a combination of elevated commodity prices and robust domestic demand. While the two-speed recovery has been spoken about for some time, its very different impact on advanced economies and EMEs is now clearly visible.

3. From the perspective of India's macroeconomic policy imperatives, a critical consideration is the effect that global conditions will have on commodity prices. Since the May 3 Statement, the prices of many commodities, including that of crude oil, have shown signs of softening, reflecting weakening demand in advanced economies. Had this trend consolidated, it would have provided some welcome relief from inflationary pressures. However, one quarter later, the downtrend has not yet proved to be very strong. Prices are generally still high compared with last year. With no immediate prospects of monetary tightening in the advanced economies, the impact of weakening demand appears to be offset by that of abundant liquidity.

4. On the domestic front, a revised and rebased index of industrial production (IIP) suggested that earlier signals of a growth deceleration in the second half of 2010-11 were exaggerated. In fact, the growth momentum remained strong throughout the year. However, data for April-May 2011 suggest that some moderation might be under way, reflecting in part a lagged response to the monetary tightening that has been effected since October 2009.

5. Notwithstanding signs of moderation, inflationary pressures are clearly very strong. Importantly, the softening of commodity prices over the past three months did not translate into a decline in either headline wholesale price index (WPI) inflation or non-food manufacturing inflation. If the softening reverses, commodity prices are likely to exert inflationary pressures for some time, making moderation in demand necessary to bring inflation down.

6. Overall, the current balance of global and domestic factors suggests that monetary policy needs to persist with a firm anti-inflationary stance. Moreover, moderating domestic growth will certainly help ease inflationary pressures, which may be reinforced by possible softening in global commodity prices.

7. This policy review is set in the context of the above uncertain global and domestic economic environment. It should be read and understood together with the detailed review in Macroeconomic and Monetary Developments released yesterday by the Reserve Bank. This Statement is organised in four sections: Section I provides an overview of the 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 policy measures.

This Review consists of four sections:

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

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

An analytical review of macroeconomic and monetary developments: First Quarter Review 2011-12, was issued on 25th July 2011, which serves as a background to the First Quarter Review of Monetary Policy 2011-12. ...Click Here

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

Mixed reactions from Banks, Economists, India Inc on RBI First Quarter Review 2010-11 ....Click Here

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