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Annual Monetary Policy Statement for the Year 2011-12
-Announced on the 3rd May 2011 by Dr. D. Subbarao, Governor, Reserve Bank of India

Introduction The Annual Policy for 2011-12 is set in conditions significantly different than they were a year ago. Last year’s policy was made in an environment of incipient domestic recovery amidst uncertainty about the state of the global economy, a perception that was reinforced with the precipitation of the Greek sovereign debt crisis a few weeks later. While signs of inflation were visible, they were driven primarily by food. However, food price pressure spilling over into more generalised inflation was clearly a risk as the recovery consolidated and domestic resource utilisation rose to levels which stretched capacities. Throughout the year, the goal of monetary policy was to nurture the recovery in the face of persistent global uncertainty while trying to contain the spillover of supply-side inflation.

2. The trend of moderating inflation and consolidating growth in the second and third quarters of 2010-11 justified the calibrated policy approach of the Reserve Bank. However, the resurgence of inflation in the last quarter of 2010-11 was a matter of concern. Although the trigger was the sharp uptrend in international commodity prices, the fact that these were quickly passing through into the entire range of domestic manufactured goods indicated that pricing power is significant. In other words, demand has been strong enough to allow significant pass-through of input price increases. Significantly, this is happening even as there are visible signs of moderating growth, particularly in capital goods production and investment spending, suggesting that cumulative monetary actions are beginning to have an impact on demand.

3. Thus, three factors have shaped the outlook and monetary strategy for 2011-12. First, global commodity prices, which have surged in recent months, are likely to, at best, remain firm and may well increase further over the course of the year. Second, headline and core inflation have significantly overshot even the most pessimistic projections over the past few months. In terms of the likely trajectory of inflation over the year, the first suggests that high inflation will persist and may get worse. The second raises concerns about inflationary expectations becoming unhinged.

4. The third factor, countering these forces, is the likely moderation in demand, which should help reduce pricing power and the extent of pass-through of commodity prices. This cannot be ignored in the policy calculation. However, a significant factor influencing aggregate demand during the year will be the fiscal situation. While the budget estimates offered reassurance of a rollback, the critical assumption that petroleum and fertiliser subsidies would be capped is bound to be seriously tested at prevailing crude oil prices. Even though adjustment of administered retail prices may add to inflation in the short run, the Reserve Bank believes that this needs to be done as soon as possible. Otherwise, the consequent increase in the fiscal deficit will counter the moderating trend in aggregate demand.

5. The monetary policy trajectory that is being initiated in this Annual Statement is based on the following premise. Over the long run, high inflation is inimical to sustained growth as it harms investment by creating uncertainty. Current elevated rates of inflation pose significant risks to future growth. Bringing them down, therefore, even at the cost of some growth in the short-run, should take precedence.

6. Against this backdrop, this Statement sets out the Reserve Bank’s assessment of the current macroeconomic situation and projections. It is organised in two parts. Part A covers Monetary Policy and is divided into four Sections. Section I provides an overview of 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. Section IV specifies the monetary and liquidity measures, including the modified operating procedures in the light of the recommendations of the Working Group on Operating Procedure of Monetary Policy (Chairman: Shri Deepak Mohanty) and the feedback received thereon.

7. Part B covers Developmental and Regulatory Policies and is divided into six sections: Financial Stability (Section I), Interest Rate Policy (Section II), Financial Markets (Section III), Credit Delivery and Financial Inclusion (Section IV), Regulatory and Supervisory Measures for Commercial Banks (Section V) and Institutional Developments (Section VI).

8. Part A of this Statement 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

I. Financial Stability    Read full text

II. Interest Rate Policy    Read full text

III. Financial Markets    Read full text

IV. Credit Delivery and Financial Inclusion    Read full text

V. Regulatory and Supervisory Measures for Commercial Banks    Read full text

VI. Institutional Developments   Read full text

An analytical review of macroeconomic and monetary developments was issued a day in advance as a supplement to this Statement, providing the necessary information and technical analysis with the help of charts and tables. ...Click Here For Macro economic and Monetary Developments : 2010-11

....Click Here For Highlights of Annual Policy Statement for the Year 2010-11

Mixed reactions from Banks, Economists, India Inc on RBI Annual Policy ....Click Here

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