Third Quarter Review of Monetary Policy 2011-12

By Dr. D. Subbarao – Governor

" According to: Prof. Harry Johnson .The Term Monetary Policy • • • • • ‘Credit policy' or called 'RBI's money management policy' in India. How much should be the supply of money in the economy? How much should be the ratio of interest? How much should be the viability of money? etc. "A policy employing the central banks control of the supply of money as an instrument for achieving the objectives of general economic policy is a monetary policy. It is related to the demand and the supply of money.

2012).200 billion during January (up to January 20. To ease the tightness in liquidity. Liquidity which has remained in deficit during 2011-12. Average borrowings under daily liquidity adjustment facility (LAF) increased from around `480 billion during April-September 2011 to around `920 billion during November and further to `1. • • .4 in November to 113.• Inflation has provided some relief. the Reserve Bank conducted open market operations (OMOs) aggregating over `700 billion during November 2011-mid January 2012.170 billion in December 2011. Average daily borrowings under the LAF were about `1.9 in December. The new combined (rural and urban) consumer price index (base: 2010=100) declined marginally from 114. tightened in the second week of November 2011. reflecting softening of food prices. even though this was caused largely by a seasonal decline in vegetable prices. reflecting the RBI forex market operations and advance tax outflows around mid-December. Consistent with the Reserve Bank’s earlier projections. inflation is likely to decelerate further to 7 per cent by March 2012.

23 banks raised their base rates by 10-100 basis points even as the modal base rate of banks remained unchanged at 10. During Q3. and 9 basis points for maturity between 1 to 3 years.75 per cent.5 per cent for the year.• Money supply (M3) growth. reflecting the strong growth in time deposits following increase in interest rates by banks. • . which was 17. The slowdown in total resource flow to the commercial sector and the peaking of base rates of banks reflect slowing down of investment activity. Deposit rate of banks increased by 44 basis points for maturity up to 1 year.6 per cent by end-December 2011 consistent with the projected trajectory of 15. moderated to 15.2 per cent at the beginning of the financial year.

0 per cent .6 per cent to 7.Baseline projection of GDP growth for 2011-12 is revised downwards from 7.

0 per cent to 5.5 per cent of their net demand and time liabilities (NDTL) effective the fortnight beginning January 28. stands at 7.0 per cent.Monetary Measures • Cash reserve ratio (CRR) : January 2010.5 per cent. Thus reduction in the (CRR) of scheduled banks by 50 basis points from 6. As a result 320 billion of primary liquidity will be injected into the banking system. determined with a spread of 100 basis points below the repo rate.October 2011. 2012. Bank Rate: has been retained at 6. the RBI cumulatively raised (CRR) by 100 basis points and the policy rate (the repo rate)from 8 to 13 times by 375 basis points as the liquidity in the system transited fron a surplus to a deficit mode.5 per cent. Reverse Repo Rate: the LAF. • • • • • . Repo Rate: the liquidity adjustment facility (LAF) has been retained at 8. stands at 9. Marginal Standing Facility (MSF) Rate: with a spread of 100 basis points above the repo rate.5 per cent.

• Ease liquidity conditions.Expected Outcomes The policy actions in this Statement given are expected to: • In reducing the CRR. the RBI has attempted to address the structural pressures on liquidity in a way that is not inconsistent with the prevailing monetary stance and for allow future rate actions towards lowering them. . • Continue to anchor medium-term inflation expectations on the basis of a credible commitment to low and stable inflation. • Shift in the balance of aggregate demand from public to private and from consumption to capital formation. • Mitigate downside risks to growth.

0 7.1 8.0 6.5 8.6 6.0 48.3 8.2 8. Real GDP growth rate at factor 8. .0 52.8 8.9 E Q4 L E Q1 L E Q2 L 2012-13 Q3 E 15 - 9 10 11 12 13 14 7.3 2.0 -38.Table VII.7 2. #: Revised Estimate.2# 3 7.0 14. L: Latest Round Projection.4 20.6 E: Previous Round Projection.8 6.8 6.1 9.3 47. Securities Yield (per cent-end period) 7.6 47.8 8.6# b.3 8.7 3.6 9.0 53. Note :The latest round refers to Eighteenth round for the quarter ended December 2011.1 3.1 4 7.6 3.9 9.0 33.0 5.5 17.1 7.8# 9.2 7.8 Quarterly Forecasts 2011-12 Q3 E 7 7.7 6.5 3.0 52. T-Bill 91 days Yield (per centend period) 6.0 7.2 L 8 6.8 8.4 -39.8 49.5 3.8 45.7 - .2 6. Exchange Rate (INR/1USD end period) 5.8 9.6 8.1 50.5 3.3 19.8 -38. Gross Domestic Saving (per cent of GDP at current market price) 3.0 46.1 3.7 -42.0 7. while previous round refers to Seventeenth round for the quarter ended September 2011.7 3. *: Actual.0 6 7.2 6.2 130.4 8.34.6 33.0 -43.0 48. ! : In US$ on BoP basis.2 8.0 14.4 4.8 7.3 26. -: Not available.4 .6 7. Services 2.8 8.5# cost (in per cent) a. Trade Balance (US$ billion) 44.8 7.7 7.6 18. Export (growth rate in per cent)! 8.4 9.0 -40. Agriculture & Allied Activities 6. Q3: 2011-12.-37.0 5 7.5 8.7 7.3 8.0 4.4 : Median Forecasts of Select Macroeconomic Indicators by Professional Forecasters 2011-12 and 2012-13 Actua Annual Forecasts l 2011-12 2012-13 201011 E L E L 1 2 1.6 6.9 3.4 6.5 9. Import (growth rate in per cent)! 9.4 8.7 8. Average WPI-Inflation 7.8* 7. 10-year Govt.0 45.1 3.3 * 8.9 - - 37.6 6.0 6.3 3.0 3.2 5. Source : 18th round of Survey of Professional Forecasters.2 - 4.5 20.7 24. Industry c.0 -34.0 34.1 9.

Nonetheless. It is likely to be below potential during 2011-12. the incomplete pass-through of rupee depreciation and slippage in fiscal deficit. but is expected to recover at a modest pace in 2012-13. price pressures remain.Macroeconomic Outlook • Growth in India is moderating more than was expected earlier. . • The slack in investment and net external demand components of aggregate demand may keep the pace of recovery low. broadly in line with the projected trajectory. • Inflation has started to fall. The decline in food inflation is likely to reverse ahead with the waning of base effects and seasonal factors behind the fall. with risks emanating from suppressed domestic energy prices.

Objectives of Monetary Policy • • • • • • • Rapid Economic Growth Price Stability Exchange Rate Stability Balace of Payment (BOP) Equilibrium Full Employment Neutrality of Money Equal Income Distribution .

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