You are on page 1of 12

Reserve Bank of India

First Quarter Review of Monetary Policy 2010-11

By
Dr. D. Subbarao
Governor

Introduction period average at the all-India level, it has


been enough to induce a significant
This First Quarter Review
increase in sown area across a range of
is being made in a macroeconomic
environment that has changed crops, the high prices of which have been
significantly since our April policy a source of great worry.
announcement. At that time, there was 3. The dominant concern that has
some optimism about the sustainability of shaped the monetary policy stance in this
the global recovery, however modest the review is high inflation. Even as food
pace may be. This was reinforced by the price inflation and, more generally,
International Monetary Fund (IMF) consumer price inflation have shown some
forecasts published earlier this month, moderation, they are still in double digits.
which suggested that global growth would Non-food inflation has risen and demand
be marginally higher than their April 2010 side pressures are clearly evident. With
projection. While most of that would come growth taking firm hold, the balance of
from emerging market economies (EMEs),
policy stance has to shift decisively to
the advanced economies would hold
containing inflation and anchoring
steady. However, in the aftermath of the
inflationary expectations.
Greek sovereign debt crisis and other
visible soft spots in Europe and the US, 4. This policy review should be read
there is renewed uncertainty about the and understood together with the detailed
sustainability of the recovery. review in Macroeconomic and Monetary
2. In contrast, on the domestic front, Developments released yesterday by
the recovery has consolidated and is the Reserve Bank. This statement is
becoming increasingly broad-based. There organised in four sections: Section I
are rising concerns about capacity provides an overview of the global and
constraints being reached over a wide domestic macroeconomic developments;
range of sectors. While inflationary Section II sets out the outlook and
pressures have also risen, the performance projections for growth, inflation and
of the monsoon so far has been monetary aggregates; Section III explains
significantly better than during last year. the stance of monetary policy; and Section
While rainfall is still below the long IV specifies the monetary measures.
I. The State of the Economy
Global Economy 8. Inflation in advanced economies is
subdued due to large output gaps and
5. In its July Update of the
high unemployment rates. Inflation
World Economic Outlook (WEO), the
expectations also remain well anchored.
IMF raised its global growth projection
In contrast, inflation in EMEs has been
for 2010 to 4.6 per cent from its April
rising due to fast emerging capacity
projection of 4.2 per cent on the strength
constraints, prompting many to reverse
of Q1 growth rates. However, the IMF’s
their expansionary monetary policies.
expectation of slightly faster global
growth is largely driven by somewhat Domestic Economy
greater optimism about EMEs. Several
9. The Indian economy grew by
assessments of advanced economies show
7.4 per cent in 2009-10. The momentum
increasing pessimism about the
was particularly pronounced in Q4 of
sustainability of the current pace of
2009-10 with growth at 8.6 per cent as
recovery. There is widespread expectation
compared with 6.5 per cent in the previous
of a slowdown of the global economy in
quarter. At constant market prices, the
the second half of 2010. pick-up in Q4 growth was even sharper at
6. In the US, recovery remains 11.2 per cent, reflecting a significant
constrained by high unemployment, turnaround in indirect tax collections.
modest income growth, lower housing 10. The double digit growth in the
wealth and tight credit. In the euro area, Index of Industrial Production (IIP) that
economic activity is weak, though more began in October 2009 continued during
resilient than expected in the face of the the current financial year although there
recent turbulence. The growth outlook was modest deceleration in May 2010.
remains clouded by concerns about the In the first two months of this fiscal,
sustainability of sovereign debt in some April-May 2010, the IIP recorded a
of the euro area economies. year-on-year growth of 14 per cent with
7. In contrast, EMEs are witnessing as many as fifteen out of the seventeen
strong growth, driven by strong domestic industry groups (two digits NIC
demand, restocking of inventories classification) showing positive growth.
and, thus far, recovering global trade. The lead indicators of service sector also
In many EMEs, especially in Asia, suggest increased economic activity.
growth is fast approaching the trend. 11. The cumulative rainfall has been
Robust macroeconomic fundamentals, 14 per cent below its long-period average
unimpaired balance sheets of corporates (LPA) during the current monsoon season
and households, sound banking sector and so far (as on July 21, 2010). Even so,
effective fiscal and monetary stimuli monsoon performance has been much
contributed to a significantly faster better than it was last year, which augurs
recovery in EMEs. well for agricultural production. Data on

2
crop-wise area indicate a significant 14. Money supply (M 3 ) growth on
increase over the relatively low levels of a year-on-year basis moderated from
last year. 16.8 per cent at end-March 2010 to
15.3 per cent as on July 2, 2010 reflecting
12. However, the current inflation
a slowdown in the growth in bank
scenario is worrisome for a number of
deposits. Time deposits decelerated
reasons. First, WPI inflation has been in
mainly because of withdrawal of deposits
double digits since February 2010.
by public sector undertakings and mutual
Headline inflation, as measured
funds. In order to finance higher credit
by year-on-year variation in WPI, rose growth in the face of declining deposit
to 10.6 per cent in June 2010, up from growth, banks unwound their investments
10.2 per cent in May 2010. Notably, WPI in mutual funds and accessed the repo
inflation based on revised data for window of the Reserve Bank.
March at 11.0 per cent and for April at
11.2 per cent, were higher by over one 15. Year-on-year non-food credit
growth accelerated from 17.1 per cent in
percentage point as compared with the
March 2010 to 22.3 per cent as on July 2,
provisional numbers. If this pattern
2010, which was higher than the indicative
continues, final WPI inflation numbers for
trajectory of 20 per cent set out in the April
recent months can be expected to be
2010 Monetary Policy Statement. This
higher.
reflects the combined impact of a pick-up
13. Second, even as primary food in industrial activity and financing of the
articles inflation continues to be in double 3G and broadband wireless access (BWA)
digits (14.6 per cent), year-on-year WPI spectrum auctions. The increase in bank
non-food manufactured products credit to the commercial sector has also
(weight: 52.2 per cent) inflation, which been supplemented by higher flow of
was (-) 0.4 per cent in November 2009, funds from other sources. Rough estimates
rose sharply thereafter to 5.4 per cent in show that the total flow of financial
March 2010 and further to 7.3 per cent resources from banks, non-banks and
in June 2010. Non-food items inflation external sources to the commercial sector
(WPI excluding food products and during Q1 of 2010-11 was at Rs.2,50,000
food articles), which was near zero crore as against Rs.61,000 crore during
in November 2009, rose sharply to Q1 of 2009-10. Disaggregated data
10.6 per cent by June 2010. Significantly, suggest that credit growth to all major
non-food items contributed over sectors such as agriculture, industry,
70 per cent to WPI inflation in June 2010, services and personal loans had begun to
suggesting that inflation is now improve from November 2009 onwards.
very much generalised. Third, 16. On the deposit side, banks
notwithstanding some moderation in increased their term deposit rates by
recent months, consumer price inflation, 75-100 basis points between March 2010
measured by various indices, remains in and July 16, 2010. On the lending
double digits. side, benchmark prime lending rates

3
(BPLRs) of scheduled commercial banks to July 16, 2010, the SLAF remains
remained unchanged from July 2009 till extended up to July 30, 2010. Second, in
end-June 2010. The banking system consultation with the Government, the
switched over to the Base Rate system notified amounts for the issuance of
with effect from July 1, 2010. The Base Treasury Bills during June 2010 were
Rates set by major banks are in the range reduced by Rs.22,000 crore. Third, during
of 7.25-8.0 per cent. While information June 16-21, 2010, the Government bought
on effective lending rates to major back securities worth Rs.9,614 crore,
categories of borrowers is not yet ahead of schedule.
available, it is expected that the Base Rate
19. There was net injection of
system will make credit pricing more
liquidity by the Reserve Bank in June and
efficient. Further, it will enhance
July 2010 (up to July 23). As a result,
transparency in lending rates and improve
overnight interest rates, which generally
monetary policy transmission.
remained around the floor of the LAF
17. Money markets remained orderly corridor up to May, moved up to the
during Q1 of 2010-11. A significant ceiling of the corridor in June 2010 and
development was that the Liquidity have remained there in July 2010 so far.
Adjustment Facility (LAF) window of the Similarly, yields on other money market
Reserve Bank, after remaining in surplus instruments increased, reflecting
mode for nearly 18 months, switched into autonomous tightening of monetary
deficit mode towards the end of May 2010 conditions by 150 basis points, equivalent
and has remained there since. This to the prevailing width of the LAF
liquidity pressure was triggered by the corridor.
increase in government cash balances on
account of larger than expected 3G and 20. At the longer end of the market,
BWA spectrum auction receipts combined the monthly average yield on the 10-year
with advance tax payments. benchmark government security fell
to 7.59 per cent in June 2010 from
18. Consistent with the stance of 8.01 per cent in April 2010 in the
active liquidity management and in order
expectation that the Government will
to prevent a disruption in credit flow, the
reduce market borrowing because of
Reserve Bank took several measures to
higher realisations from spectrum
ease the pressure. First, on May 26, 2010,
auctions. Subsequently, the yield moved
the Reserve Bank announced additional
up to 7.73 per cent by the third week of
liquidity support under the LAF to
July 2010.
scheduled commercial banks to the extent
of up to 0.5 per cent of their net demand 21. Equity markets exhibited volatile
and time liabilities (NDTL). A second conditions during the current financial
LAF (SLAF) was also made available on year, although they have firmed up in
a daily basis. Both these facilities, which recent weeks. Resource mobilisation by
were initially available till July 2, 2010, the corporates through public issues in the
were later extended. While the additional primary segment of the capital market
liquidity support facility was extended up continued its uptrend. The foreign

4
exchange market saw volatility increase 38.5 per cent (Rs.1,32,900 crore) of the
relative to the previous quarter, with borrowing was completed by mid-July
the rupee showing two-way movements 2010. As against the budgeted amount of
in the range of Rs.44.33-Rs.47.57 per Rs 35,000 crore, the actual realisations
US dollar. under 3G and BWA auctions were about
Rs. 1,06,000 crore, resulting in an increase
22. During the first quarter of
in receipts by over one per cent of GDP.
2010-11, both the nominal and real
It is, however, important to ensure that this
effective exchange rates (NEER and
one-off increase does not slacken the
REER) have appreciated. While the much needed efforts towards fiscal
appreciation in 36-currency NEER/REER consolidation.
at about 1.5 per cent (up to May) was
similar, real appreciation on the basis of 24. During the first two months of
6-currency REER was higher at 3.3 per 2010-11, both exports and imports
cent as compared with 6-currency NEER continued to expand in contrast to the
appreciation of 1.4 per cent, reflecting contraction they showed during the
corresponding period of last year. The
higher inflation differentials between
trade deficit widened during April-May
India and major advanced economies.
2010 to US$ 21.7 billion, up from
23. Of the budgeted net market US$ 14.4 billion in the corresponding
borrowing of the Central Government for period of the previous year, reflecting the
2010-11 at Rs. 3,45,010 crore, about sustained increase in domestic activity.

II. Outlook and Projections


Global Outlook inflation scenario in advanced economies
has been shaped by high unemployment,
Growth
low capacity utilisation and renewed
25. In its July Update of the World uncertainties about the financial sector.
Economic Outlook, the IMF revised Headline inflation in advanced economies,
upwards its growth projection for the which inched up during January-March
global economy for 2010 to 4.6 per cent 2010, softened thereafter. Inflation
from 4.2 per cent in April 2010 on the expectations too remain well anchored;
strength of robust Q1 growth. However, indeed, concerns about deflation have
as indicated earlier, recent data and re-emerged in some of the advanced
analysis suggest slowing down of the economies. In contrast, the relatively rapid
global growth momentum and the recovery in EMEs has also been
expectation is that global growth in the accompanied by faster growth in prices.
second half of 2010 will be lower than that
27. Significantly, with increasing
in the first half.
uncertainty about the pace of global
Inflation recovery, global energy and commodity
26. Just like growth, inflation around prices have softened. This trend has
the world too has been multi-speed. The been reinforced by the slowdown of the

5
Chinese economy. Consequently, global various services have shown significant
inflationary pressures are expected to be improvements.
subdued over the next few months. 30. The strength of the recovery is
Domestic Outlook also reflected in the sales and profitability
growth of the corporate sector. Besides
Growth replenishment of inventories, investment
28. The growth prospects of the Indian intentions are being translated into action
economy have improved since April across sectors, particularly in power,
2010. Although cumulative rainfall so far telecom and metals. Increase in resource
has been 14 per cent below the LPA, the mobilisation by the commercial sector
monsoon has been better than during from both banks and non-banks and the
last year. Should overall monsoon widening of the current account deficit
performance turn out to be as projected also suggest strong underlying growth
(102 per cent of LPA), there will be a momentum.
pick-up in rural demand. This should 31. Domestic drivers of growth are
give further momentum to the robust. However, if the global recovery
performance of the industrial sector, slows down, it will affect all EMEs,
which has been growing firmly since including India, through the usual exports,
October 2009. financing and confidence channels.
29. Growth in exports, which turned 32. Taking into account the progress
positive in October 2009, picked up of monsoon so far and the prevailing
further in subsequent months despite global macroeconomic scenario, for
concerns over the external demand policy purposes, the baseline projection
outlook due to the sovereign debt problem of real GDP growth for 2010-11 is revised
in euro area. Service sector activities have to 8.5 per cent, up from 8.0 per cent with
also shown buoyancy since the latter half an upside bias as indicated in April 2010
of 2009-10. The leading indicators of policy statement (Chart 1). This upward

Chart 1: Projection of GDP Growth for 2010-11


10
GDP Growth (%)

6
2010-11
2007-08
2006-07

2008-09
2005-06

2009-10

Baseline Projection 50 Per cent CI 70 Per cent CI 90 Per cent CI CI - confidence interval

6
revision is primarily based on better percentage point on WPI inflation, with
industrial production and its favourable second round effects coming through in
impact on the services sector, giving due the months ahead.
consideration to the global scenario. 36. Minimum support prices (MSPs)
33. The Reserve Bank’s growth for some agricultural commodities have
projection for 2010-11 is consistent with also been increased to incentivise farmers.
the median growth forecast from its Food price inflation has remained at an
professional forecasters’ survey and other elevated level for over a year now,
agencies. It must be noted that the IMF reflecting structural bottlenecks in certain
growth forecast for India at 9.4 per cent commodities such as pulses, milk and
for calendar 2010 is based on GDP at vegetables. The Reserve Bank’s quarterly
market prices, whereas other projections, inflation expectation survey conducted
including that of the Reserve Bank, are during the first fortnight of June 2010
based on GDP at factor cost. Adjusting for indicates that short-term inflationary
this, the IMF projections are in line with expectations have increased marginally.
others. 37. Going forward, the outlook on
Inflation inflation will be shaped by the following
factors. First, the spatial and temporal
34. WPI inflation moved to double distribution of rainfall in the remaining
digits in February 2010 and has remained period of south-west monsoon 2010 is
there since then. Even as food price critical. A good kharif harvest will act as
inflation and consumer price inflation a major dampener on short-term food price
remain at elevated levels, inflation is now inflation. Second, global energy and
being significantly driven by demand side commodity prices have been showing
factors. distinct signs of softening over the past
35. In its policy statement of April few weeks as expectations of global
2010, the Reserve Bank had placed the growth have moderated. If energy prices
baseline projection for WPI inflation for continue to decline, this will offset the
March 2011 at 5.5 per cent. Subsequently, inflationary impact of the recent fuel price
there has been an increase in prices of hike. Further, idle global capacity in a
many administered/regulated items range of sectors will allow competitive
such as petroleum products, iron ore and imports to reduce the momentum in
electricity. The recent partial deregulation domestic prices. Third, consequent on the
and increase in administered prices of strengthening of domestic growth drivers,
petroleum products is welcome from the demand-side pressures are building up.
long-term fiscal consolidation and energy 38. Taking into account the emerging
conservation perspective. Nevertheless, it domestic and external scenario, the
will have an inflationary impact in the baseline projection for WPI inflation for
short term. Assuming that global crude oil March 2011 has been raised to 6.0 per cent
prices remain stable, the immediate from 5.5 per cent as indicated in the
impact on inflation will be about one April policy statement (Chart 2).

7
Chart 2: Projected Path of Y-o-Y WPI Inflation
14
12
10

Inflation Rate (%)


8
6
4
2
0
-2

Mar-11
Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10
Baseline Projection 50 Per cent CI 70 Per cent CI 90 Per cent CI CI - confidence interval

39. The Reserve Bank will endeavour 3.0 per cent inflation consistent with
to achieve price stability and anchor India’s broader integration into the global
inflation expectations. In pursuit of these economy.
objectives, the Reserve Bank will continue
to evaluate an array of aggregate and Monetary Aggregates
disaggregated measures of inflation in the 41. While the current year-on-year
context of the evolving macroeconomic money supply (M3) growth at 15.3 per cent
situation. is below the indicative projection of
40. Notwithstanding the current 17.0 per cent, non-food credit growth at
inflation scenario, it is important 22.3 per cent was marginally higher than
to recognise that in the last decade the indicative projection of 20.0 per cent.
(2000-01 to 2009-10), the average It is expected that even with the higher
inflation rate, measured both in terms growth projection, monetary aggregates
of WPI and CPI, moderated to around will evolve along the projected trajectory
5 per cent from the historical trend rate indicated in the April policy statement.
of about 7.5 per cent. A combination Accordingly, the M3 and non-food credit
of factors played a role in this growth projections for 2010-11 have been
transformation. One of these was a retained at 17 per cent and 20 per cent
monetary policy committed to keeping respectively. As always, these numbers are
inflation low and stable. This record is an indicative projections and not targets.
important foundation for the credibility of
Risk Factors
monetary policy and, more generally, the
broader inflation management framework. 42. The above macroeconomic and
Against this backdrop, the conduct of monetary projections are subject to a
monetary policy will continue to condition number of upside and downside risks.
and contain perception of inflation in the 43. The main risk emanates from the
range of 4.0-4.5 per cent. This will be in global scenario and has two key
line with the medium-term objective of dimensions. First, if the global recovery

8
falters, the risk of which has state of global economy, central banks in
increased since the April 2010 policy advanced economies are likely to maintain
announcement, the performance of EMEs accommodative monetary policies for an
is likely to be adversely affected. While extended period. With the strong growth
India’s trade linkages with the advanced potential of EMEs, including India, this
economies are appreciably smaller than is likely to trigger large capital inflows.
those of other major EMEs, a widespread Large capital inflows above the absorptive
slowdown in global trade will have an capacity of the economy will pose
impact on important manufacturing and a challenge for monetary and exchange
service sectors. rate management. This also has
implications for asset prices. In this
44. The more significant risk, though,
scenario, a widening current account
is from a potential slowdown in capital
deficit will help absorb a larger proportion
inflows. India’s rapid recovery has
of the inflows.
resulted in a widening of the current
account deficit, as imports have grown 46. On the inflation front, the
faster than exports. Even if exports slow prospects of softening of domestic
down, the strength of domestic growth inflation around mid-year 2010-11 are
drivers will keep imports buoyant, contingent on moderating food prices.
suggesting a widening of the trade deficit. Rainfall has been generally adequate so
However, in the face of a global far, indicating good prospects for the
slowdown, increasing risk aversion agricultural sector. But, with two months
amongst global investors may yet to go for the season, the risk of
significantly reduce the flow of capital inadequate rainfall adversely affecting
into EMEs, including India. Apart from specific regions and crops remains.
narrowing the comfortable buffer between
47. However, with respect to
the current account deficit and net capital
controlling inflation, the global scenario
inflows, this may constrain domestic
may generate some favourable impulses.
investment, which is critical to achieving
Slower global growth will help lower
and sustaining high growth rates.
energy and commodity prices. Unutilised
45. Admittedly, the risk of capital global capacity in many sectors will also
flows runs both ways. Given the present ease pressure on prices.

III. The Policy Stance

48. Since October 2009, when it of India’s specific growth-inflation


signalled the reversal of its policy stance, dynamics in the broader context of
the Reserve Bank has cumulatively raised persistent global uncertainty.
the CRR by 100 basis points and the repo
and reverse repo rates under the LAF by 49. Thus, our policy stance for
75 basis points each. The monetary policy 2010-11 has been conditioned by three
response has been calibrated on the basis major considerations:

9
50. First, domestic economic recovery and inflation scenario, while taking care
is firmly in place and is strengthening. The not to disrupt the recovery.
7.4 per cent growth in 2009-10 despite
53. In this consideration, the liquidity
weak global growth and the insignificant
situation plays a crucial role. It is well
contribution of the agriculture sector is a
understood that transmission of monetary
testimony of the resilience of the Indian
policy through rate actions works most
economy. The Reserve Bank’s upward
effectively when liquidity is being
revision of the GDP growth projection for
injected into the financial system by the
2010-11 to 8.5 per cent (from 8.0 per cent
central bank, rather than when it is being
with an upside bias in April 2010) indicates
absorbed. Our calibrated actions to absorb
that the economy is steadily reverting to
surplus liquidity from October 2009
its pre-crisis growth trajectory. However,
onwards were reinforced by market
even as this is happening, prospects of a
conditions, which evolved in early June
sustained global recovery appear to be
2010 and still persist. Consequently,
increasingly uncertain, with possible
overnight call money interest rates have
adverse consequences for the EMEs,
moved towards the upper bound of the
including India.
LAF corridor, which is equivalent to
51. Second, inflationary pressures effective tightening of rates by 150 basis
have exacerbated and become generalised, points. This has also brought the system
with demand-side pressures clearly closer to a point at which policy rate
evident. Capacity constraints are visible actions are likely to have greater traction.
in several sectors and pricing power is
returning to producers. Inflationary 54. Current market conditions indicate
expectations also remain at an elevated that while liquidity pressures will ease, the
level. Given the spread and persistence of system is likely to remain in deficit mode
inflation, demand-side inflationary for now. This implies a significant change
pressures need to be contained. in the monetary operations, which has a
direct bearing on our actions. In a deficit
52. Third, despite the increase in the liquidity mode, the repo rate under the
policy rates by 75 basis points
LAF has emerged as the operating policy
cumulatively, real policy rates are not
rate. The LAF operates in such a manner
consistent with the strong growth that
that as systemic liquidity alternates from
the economy is now witnessing. As
surplus to deficit, even at the margin, the
articulated in previous policy statements/
overnight call money rates alternate
reviews, lower policy rates can complicate
between the reverse repo rate and the repo
the inflation outlook and impair
rate. This imparts volatility to call rates
inflationary expectations, particularly
to the extent of the width of the LAF
given the increased generalisation of
corridor.
inflation. It is, therefore, imperative that
we continue in the direction of 55. There is no unique way to
normalising our policy instruments to a determine the appropriate width of the
level consistent with the evolving growth policy interest rate corridor. But the

10
guiding principles are: (i) it should be a quarter. In a rapidly evolving
broad enough not to unduly incentivise macroeconomic situation, however, a gap
market participants to place their surplus of a quarter between policy reviews can
funds with the central bank; (ii) it should be too long. In recent years, there have
not be so broad that it gives scope for been several occasions (April, June and
greater interest rate volatility to distort the September-December 2008; January and
policy signal. The challenge, therefore, is March 2009; and March and July 2010)
to strike the right balance. when the Reserve Bank had to take off-
56. As the systemic liquidity transits cycle policy actions in response to
from an uni-directional surplus mode to macroeconomic developments. While
a bi-directional mode, it will have these instances challenge the discipline of
implications for the effectiveness of the quarterly schedule, they also
monetary transmission. In the context of underscore the need for flexibility to
the changing liquidity dynamics, the manoeuvre. Many major central banks in
operation of the LAF needs to be studied. the world make monetary policy
Accordingly, it is proposed to set up a announcements more frequently ranging
Working Group to review the current generally from 8 to 12 announcements in
operating procedure of monetary policy of a year. It is, therefore, proposed to
the Reserve Bank, including the LAF. formalise what is already an informal,
internal process.
57. Against the above stated backdrop,
the stance of monetary policy is intended 59. Accordingly, the Reserve Bank
to: will now undertake mid-quarter reviews
roughly at the interval of about one and
∑ Contain inflation and anchor
half months after each quarterly review.
inflationary expectations, while being
As per schedule, mid-quarter reviews will
prepared to respond to any further
be in June, September, December and
build-up of inflationary pressures.
March. They will be by way of a press
∑ Maintain an interest rate regime release, which will provide a rationale
consistent with price, output and for either action or maintenance of the
financial stability. status quo.
∑ Actively manage liquidity to ensure 60. Mid-quarter Reviews are intended
that it remains broadly in balance so to communicate our assessment of
that excess liquidity does not dilute economic conditions more frequently. By
the effectiveness of policy rate instituting these, it is our intention to take
actions. the surprise element out of the off-cycle
actions. However, the Reserve Bank will
Mid-Quarter Review of Monetary
have the flexibility, as always, to take
Policy
swift and pre-emptive policy action, as
58. At present, scheduled policy and when warranted by the evolving
announcements are made once in macroeconomic developments.

11
IV. Monetary Measures
61. On the basis of the current Expected Outcomes
assessment and in line with the policy stance
66. Monetary policy actions are
as outlined in Section III, the Reserve Bank expected to:
announces the following policy measures:
a. Moderate inflation by reining in
Bank Rate demand pressures and inflationary
62. The Bank Rate has been retained expectations.
at 6.0 per cent. b. Maintain financial conditions
Repo Rate conducive to sustaining growth.
c. Generate liquidity conditions consistent
63. It has been decided to:
with more effective transmission of
∑ increase the repo rate under the policy actions.
Liquidity Adjustment Facility (LAF) by
d. Reduce the volatility of short-term rates
25 basis points from 5.5 per cent to 5.75
in a narrower corridor.
per cent with immediate effect.
Mid-Quarter Review of Monetary Policy
Reverse Repo Rate
2010-11
64. It has been decided to: 67. The next mid-quarter review of
∑ increase the reverse repo rate under Monetary Policy for 2010-11 will be
the LAF by 50 basis points from announced through a press release on
4.0 per cent to 4.50 per cent with September 16, 2010.
immediate effect. Second Quarter Review of Monetary
Cash Reserve Ratio Policy 2010-11
65. The cash reserve ratio (CRR) of 68. The second quarter review of
scheduled banks has been retained at 6.0 per Monetary Policy 2010-11, including
cent of their net demand and time liabilities developmental and regulatory policies, is
(NDTL). scheduled on November 2, 2010.

Mumbai
July 27, 2010

12