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Annual Monetary Policy Statement for the Year 2013-14
-Announced on the 3rd May 2013 by Dr. D. Subbarao, Governor, Reserve Bank of India

#It has been decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.5 per cent to 7.25 per cent with immediate effect.
#The cash reserve ratio (CRR) of scheduled banks has been retained at 4.0 per cent of their net demand and time liabilities (NDTL).

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The Annual Policy for 2013-14 is formulated in an environment of incipient signs of stabilisation in the global economy and prospects of a turnaround, albeit modest, in the domestic economy.

2. In the advanced economies (AEs), near-term risks have receded, aided by improving financial conditions and supportive macroeconomic policies. But this improvement is yet to fully transmit to economic activity which remains sluggish. Policy implementation risks and uncertainty about outcomes continue to threaten the prospects of a sustained recovery. Emerging and developing economies (EDEs) are in the process of a multi-speed recovery. However, weak external demand and domestic bottlenecks continue to restrain investment in some of the major emerging economies. Inflation risks appear contained, reflecting negative output gaps and the recent softening of international crude and food prices.

3. Domestically, growth slowed much more than anticipated, with both manufacturing and services activity hamstrung by supply bottlenecks and sluggish external demand. Most lead indicators suggest a slow recovery through 2013-14. Inflation eased significantly in Q4 of 2012-13 although upside pressures remain, both at wholesale and retail levels, stemming from elevated food inflation and ongoing administered fuel price revisions. The main risks to the outlook are the still high twin deficits accentuated by the vulnerability to sudden stop and reversal of capital flows, inhibited investment sentiment and tightening supply constraints, particularly in the food and infrastructure sectors.

4. This Statement, set in the above global and domestic context, should be read and understood together with the detailed review in Macroeconomic and Monetary Developments released yesterday by the Reserve Bank.

5. This Statement 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; and Section IV specifies the monetary measures. Part B covers developmental and regulatory policies and is organised into five sections: Financial Stability (Section I); Financial Markets (Section II); Credit Delivery and Financial Inclusion (Section III); Regulatory and Supervisory Measures (Section IV) and Institutional Developments (Section V).

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

50. This part of the Statement reviews the progress on various developmental and regulatory policy measures announced by the Reserve Bank in recent policy statements and also sets out fresh measures.

51. Near-term risks to global financial stability are retreating as the probability associated with tail events has reduced, rekindling risk appetite as reflected in sharp rallies in financial markets. In AEs, funding conditions have improved, but credit conditions remain stressed on concerns about debt overhangs and the persisting fragility of balance sheets. For EDEs, potential spillovers from unconventional policies in AEs remain significant, especially mispricing of credit risk, a rise in liquidity risk, and excessive capital flows entailing increased debt and foreign exchange exposure in response to low borrowing costs. In addition to safeguarding domestic financial stability, these economies also face the challenge of creating conducive financing conditions for accelerating growth with stability.

52. Internationally, efforts towards strengthening the global financial regulatory architecture remain incomplete and delayed, increasing vulnerability and uncertainty. Decisive and well-coordinated actions are needed to progress resolutely on restructuring weak segments of the financial system, building up capital and liquidity buffers and forward looking provisioning, developing a robust framework for systemically important entities, enhancing disclosures to improve market discipline, establishing effective resolution regimes including cross-border resolution agreements, extending the regulatory perimeter to unregulated entities, and convergence of accounting norms.

53. In this challenging and uncertain international environment, ongoing structural reforms seek to make the Indian banking system more efficient, resilient, and socially more relevant. The emphasis has been on strengthening balance sheets and governance frameworks in a non-disruptive manner, sequenced into fortifying and refining the prudential framework in line with Basel III, but adapted to country-specific requirements. A key area of focus has been managing systemic risks in the time dimension through countercyclical policies employing time varying sectoral risk weights and provisioning as also cross-sectionally in terms of interconnectedness and common exposures. The triad of financial inclusion, financial literacy and consumer protection have been recognised as intertwining threads in the pursuit of financial stability. As regards non-bank financial entities, the initial focus on depositor protection has broadened into a more comprehensive framework aimed at mitigating systemic risks. The development of financial markets, products and processes continues to be pursued within the broader context of financial stability, balancing innovations with the containment of excesses in tune with the maturing of the financial system and the needs of the real economy.

54. Against this backdrop, the Statement on Developmental and Regulatory Policies for 2013-14 assesses the progress made on past policy announcements and sets out the policy initiatives in key areas which include strengthening of financial market infrastructure; improving credit flow to productive sectors, including agriculture; implementation of a dynamic provisioning regime for banks; designing of a framework for monitoring liquidity risk; finalisation of guidelines for licensing of new banks in the private sector; reviewing the banking structure in India; regulation of wealth management activities; customer service initiatives; expansion of payment system infrastructure and mitigation of concentration risk in the system; streamlining the system of distribution of banknotes and coins; and improving the mechanism for detection and reporting of counterfeit banknotes.

I. Financial Stability    Read full text

II. Financial Markets    Read full text

III. Credit Delivery and Financial Inclusion    Read full text

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

V. 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 : 2012-13

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