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CURRENT MONETARY
POLICY
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The Monetary Policy for 2010-11 set a situationwhich is more reassuring than it was a quarter ago,
uncertainty about the shape and pace of global
recovery persists.
Indias growth-inflation dynamics are in contrast to
the overall global scenario.
The economy is recovering rapidly from the growth
slowdown but inflationary pressures, which weretriggered by supply side factors, are now developing
into a wider inflationary process.
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Indias rapid turnaround after the crisis inducedslowdown evidences the resilience of our economy
and our financial sector. However, this should not
divert us from the need to bring back into focus the
twin challenges of macroeconomic stability and
financial sector development.
This statement is organised in two parts. Part A covers
Monetary Policy and is divided into four Sections.
Part B covers Developmental and Regulatory Policies
and is organised into six sections.
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PART (A). MONETARY POLICY
Section (I). The State of the Economy
Global Economy
The global economy continues to recover amidst
ongoing policy support and improving financial marketconditions.
The global economy continues to face several challenges
such as high levels of unemployment, which are close to
10 per cent in the US and the Euro area.
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Core measures of inflation in major advanced economies
are still moderating as the output gap persists and
unemployment remains high.
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DOMESTIC ECONOMY
The Reserve Bank had projected the real GDP growthfor 2009-10 at 7.5 per cent.
The uptrend in industrial activity continues. The index of
industrial production (IIP) recorded a growth of 17.6 per
cent in December 2009, 16.7 per cent in January 2010and 15.1 per cent in February 2010.
After a continuous decline for eleven months, imports
expanded by 2.6 per cent in November 2009, 32.4 per
cent in December 2009, 35.5 per cent in January 2010
and 66.4 per cent in February 2010.
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The acceleration in non-oil imports since November
2009 further evidences recovery in domestic demand
After twelve months, exports have turned around since
October 2009 reflecting revival of external demand.
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A sharp recovery of growth during 2009-10 despite the
worst south-west monsoon since 1972 attests to the
resilience of the Indian economy increasing private
consumption (36 per cent), government consumption (14per cent), fixed investments (26 per cent) and net exports
(20 per cent).
Growth in monetary and credit aggregates during 2009-
10 remained broadly in line with the projections set out
in the Third Quarter Review in January 2010
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Non-food bank credit expanded steadily during the
second half of the year from its intra-year low of 10.3
per cent in October 2009 to 16.9 per cent by March
2010.
Scheduled commercial banks (SCBs) raised their
deposit rates by 25-50 basis points between February and
April 2010 signalling a reversal in the trend of reduction
in deposit rates
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The Reserve Bank absorbed about Rs.1,00,000 crore on
a daily avg.basis under the liquidity adjustment facility
(LAF) during the current financial year up to February
12, 2010,till the crr came into affect. During February 27- March 31, 2010, the average daily
absorption of surplus liquidity declined to around Rs.
38,200 crore reflecting the increase in the CRR
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II. OUTLOOK AND PROJECTIONS
Global Outlook (growth)
In its World Economic Outlook Update for January
2010, the International Monetary Fund (IMF) projected
that global growth will recover from (-) 0.8 per cent in2009 to 3.9 per cent in 2010 and further to 4.3 per
cent in 2011.
Three major factors that have contributed to the
improved global outlook are the massive monetaryand fiscal support, improvement in confidence and a
strong recovery in EMEs.
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US GDP rose by 5.6 per cent on an annualized basis
during Q4 of 2009. However, household spending
remains constrained by high unemployment at 9.7 per
cent.
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Inflation
Inflation rates rose between November 2009 and January
2010, softened in February 2010 on account of
moderation of food, metal and crude prices and againrose marginally in some major economies in March 2010
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Domestic Outlook
Growth
According to the Reserve Banks quarterly industrial outlook
survey, the business expectation index (BEI) showedseasonal moderation from 120.6 in Q4 of 2009-10 to 119.8 inQ1 of 2010-11, it was much higher in comparison with thelevel of 96.4 a year ago.
The improved performance of the industrial sector isreflected in the improved profitability in the corporatesector. Service sector activities have shown buoyancy,especially during the latter half of 2009-10.
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Inflation
Headline WPI inflation, which moderated in the first half
of 2009-10, firmed up in the second half of the year.
It accelerated from 1.5 per cent in October 2009 to 9.9
per cent by March 2010. The deficient south-west
monsoon rainfall accentuated the pressure on food prices
The Reserve Banks baseline projection of WPIinflation for March 2010 was 8.5 per cent.
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Monetary Aggregates
During 2009-10, money supply growth decelerated
from over 20.0 per cent at the beginning of the
financial year to 16.4 per cent in February 2010
before increasing to 16.8 per cent by March 2010,
slightly above the Reserve Banks indicative projection
of 16.5 per cent. This was reflected in non-food credit
growth of 16.9 per cent, above the indicative
projection of 16.0 per cent.
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III. THE POLICY STANCE
. In the wake of the global economic crisis, the
Reserve Bank pursued an accommodative
monetary policy beginning mid-September
2008. This policy instilled confidence in market
participants, mitigated the adverse impact of
the global financial crisis on the economy and
ensured that the economy started recoveringahead of most other economies
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The process was carried forward by the second
phase of exit when the Reserve Bank announced a
75 basis points increase in the CRR in the Third
Quarter Review of January 2010.
As inflation continued to increase, driven
significantly by the prices of non-food
manufactured goods, and exceeded the ReserveBanks baseline projection of 8.5 per cent for
March 2010
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IV. MONETARY MEASURES
Bank Rate
The Bank Rate has been retained at 6.0 per
cent.
Repo Rate
It has been decided to:
increase the repo rate under the Liquidity
Adjustment Facility (LAF) by 25 basis points
from 5.0 per cent to 5.25 per cent with
immediate effect.
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Reverse Repo Rate
It has been decided to:
increase the reverse repo rate under the LAF by 25basis points from 3.5 per cent to 3.75 per cent with
immediate effect. Cash Reserve Rate
It has been decided to:
increase the cash reserve ratio (CRR) of scheduled
banks by 25 basis points from 5.75 per cent to 6.0per cent of their net demand and time liabilities(NDTL) effective the fortnight beginning April 24,2010.
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