RBI MONETARY POLICY REVIEW

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RBI MONETARY POLICY REVIEW

Policy Action

RBI cuts CRR by 50 bps to 5.5%

CRR cut effective beginning 28^th Jan 2012

CRR cut will infuse Rs 32,000 Cr liquidity in system

Repo Rate retained at 8.5%

Reverse Repo rate remains unchanged at 7.5%

Marginal Standing Facility stands at 9.5%

Bank Rate retained at 6%

- Policy actions to address food, infra supply constraints imp for rate reduction

- Fiscal slippages pose significant risk to inflation, policy stability

- It is premature to begin reducing policy rates

- Reduction in policy rates to be determined by sustained signs of inflation moderation

- Risks to growth have increased at this juncture

- Crude prices, fiscal slippage, rupee fall continues to pose inflationary risks

RBI MONETARY POLICY REVIEW

Growth Outlook

FY12 GDP growth revised downward from 7.6% to 7%

Downside risks have increased since October even as inflation remains elevated

There is increased global uncertainty, weak industrial growth, slowdown in investment

Agricultural prospects look buoyant

Slower industrial growth will impact services sector growth

Economy will exhibit modest recovery in 2012-13

RBI MONETARY POLICY REVIEW

Guidance

 Growth - Inflation balance of monetary policy stance shifted to growth

Cut in CRR to address structural pressures on liquidity

Based on current inflation, premature to begin reducing policy rates

RBI will be constrained from lowering policy rate in absence of fiscal consolidation

Reduction will be conditioned by signs of sustainable moderation in inflation

CRR reduction reinforces guidance that future rate actions will be towards lowering them

Timing and magnitude of future actions contingent on various factors

Policy actions to induce investment & address supply bottlenecks critical

Fiscal slippage poses significant threat to inflation management

Fiscal slippage poses significant threat to macroeconomic stability

Union budget must begin process of fiscal consolidation  

Prudent to fully deregulate diesel prices to contain aggregate demand & trade deficit

RBI MONETARY POLICY REVIEW

Inflation

Food inflation has moderated more than anticipated

Benefit offset by lower moderation in manufactured goods inflation

Baseline projection for WPI inflation retained at 7%

Rupee depreciation, suppressed inflation in preventing downward revision of inflation

Inflation will remain vulnerable to variety of upside risks

RBI MONETARY POLICY REVIEW

Fiscal Worries

Gross fiscal deficit for FY12 will overshoot budget estimate substantially

Fiscal deficit could potentially crowd  out credit to the private sector

Fiscal slippages  adding to inflationary pressures & continue to pose a risk

RBI MONETARY POLICY REVIEW

Liquidity

Liquidity conditions have remained beyond comfort zone

Structural deficit in the system has increased significantly

Structural deficit could hurt credit flow to productive sectors

Structural deficit presents a strong case for injecting permanent liquidity

RBI MONETARY POLICY REVIEW

Global Risks

Sovereign debt concerns in Eurozone pose a major downside risk to growth

Uncertainty will adversely affect Indian growth through trade

Slowing capital flows raises concerns about current account deficit

RBI MONETARY POLICY REVIEW

Credit & Deposit Growth

Credit offtake has been below projected trajectory

Nonfood credit growth scaled down to 16% vs. 18%

Money supply growth projection for FY12 retained at 15.5%