Rbi Monetary Policy Review of 2011-2013.

Monetary policy 2012-2013 * Reduce the repo rate under the liquidity adjustment facility (LAF) by 50 basis points from 8.5 per cent to 8.0 per cent with immediate effect. * The reverse repo rate under the LAF, determined with a spread of 100 basis points below the repo rate, stands adjusted to 7.0 per cent with immediate effect. * Raise the borrowing limit of scheduled commercial banks under the marginal standing facility (MSF) from 1 per cent to 2 per cent of their net demand and time liabilities (NDTL) outstanding at the end of second preceding fortnight with immediate effect. * Reduce the repo rate under the liquidity adjustment facility (LAF) by 50 basis points from 8.5 per cent to 8.0 per cent with immediate effect. * The reverse repo rate under the LAF, determined with a spread of 100 basis points below the repo rate, stands adjusted to 7.0 per cent with immediate effect. * Raise the borrowing limit of scheduled commercial banks under the marginal standing facility (MSF) from 1 per cent to 2 per cent of their net demand and time liabilities (NDTL) outstanding at the end of second preceding fortnight with immediate effect. * The MSF rate, determined with a spread of 100 basis points above the repo rate, stands adjusted to 9.0 per cent with immediate effect * The Bank Rate stands adjusted to 9.0 per cent with immediate effect * The cash reserve ratio (CRR) of scheduled banks has been retained at 4.75 per cent of their NDTL. * The policy actions taken are expected to: * Stabilize growth around its current post-crisis trend; * Contain risks of inflation and inflation expectations re-surging; and * Enhance the liquidity cushion available to the system.

Projections: * The advance estimate of the GDP growth of 6.9 per cent for 2011-12 by the Central Statistics Office (CSO) is close to the Reserve Bank’s baseline projection of 7.0 per cent. * Going forward into 2012-13, assuming a normal monsoon, agricultural growth could stay close to the trend level. * Industry is expected to perform better than in last year as leading indicators of industry suggest a turnaround in IIP growth * It must be emphasized that the main reason for the apparent decline in the growth , emergence of significant supply bottlenecks on a variety of fronts – infrastructure, energy, minerals and labor. * There also remains an element of suppressed inflation in respect of coal and electricity. * However, non-food manufactured products inflation is expected to remain contained reflecting the lagged effect of past monetary policy tightening on aggregate demand * WPI and CPI down from its earlier trend rate of about 7.5 per cent. Perception of inflation in the range 4.0-4.5 per cent. This is in line with the medium-term objective of 3.0 per cent inflation consistent with India’s broader integration into the global economy.
Economy conditions: * Fuel inflation moderated from over 15 per cent in November-December 2011 to 10.4 per cent in March 2012 even as global crude oil prices rose sharply,

* Notably, consumer price index (CPI) inflation increased sharply from 7.7 per cent in January to 8.8 per cent in February reflecting a reversal in food inflation. * CPI, excluding food and fuel, was in double digits, suggesting that price pressures were still high at the retail level. * The US economy continues to show signs of modest recovery. * Large scale liquidity infusions by the European Central Bank (ECB) have significantly reduced stress in the global financial markets * Crude oil prices have risen by about 10 per cent since January and show signs of persisting at current levels. * The fiscal deficit of the Central Government has remained elevated since 2008-09. The fiscal slippage in 2011-12 was also significantly high. Even though the Union Budget envisages a reduction in the fiscal deficit in 2012-13, * Moderation of industrial growth * Growth in the index of industrial production (IIP) decelerated to 3.5 per cent during 2011-12 (April-February) from 8.1 per cent in the corresponding period of the previous year * Whole sale price index (WPI) inflation, which remained above 9 per cent during April-November 2011, moderated to 6.9 per cent by end-March 2012, consistent with the Reserve Bank’s indicative projection of 7 per cent * Mirroring tight liquidity conditions and higher cost of borrowings from banks, corporate increased their recourse to non-bank sources, especially foreign direct investment (FDI) and commercial paper. Consequently, despite lower bank credit expansion (in absolute terms), the total flow of financial resources to the commercial sector was higher at `12.7 trillion during 2011-12 as compared with `12.4 trillion during the previous year * It also signaled an intention to restrict the expenditure on subsidies to under 2 per cent of GDP in 2012-13 * During April-December 2011, India’s current account deficit (CAD) widened to US$ 53.7 billion (4.0 per cent of GDP) from US$ 39.6 billion (3.3 per cent of GDP) in April-December 2010, largely reflecting a higher trade deficit. * Even though net FDI inflows were higher in April-December 2011 than in the comparable period of the previous year, portfolio flows were lower, resulting in a decline in overall capital inflows as compared with the previous year.

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Deteriorating growth of the global economy have raised concerns as impact of the same could be observed in the domestic economy, as increasing inflation, high CAD, etc is prevailing
 The step which is taken by most of the developed economies i.e. quantitative easing is affecting adversely to emerging economies like India, as they are dependent on importing oil
 Though Purchasing Managers Index(PMI) has increased by 0.1%, expansion pace has slowed down heavily
 RBI has increased the limit of export credit refinance from 15% to 50% which would increase the liquidity potentiality up to Rs.300 billion, this step would have its effect equivalent to 50 basis points reduction in CRR
 Rupee Value has further depreciated since last review policy and is continuing to move in that direction
RBI Injected more than Rs.170 billion into the banking system
 Recent reform measures taken by government to stabilise the economy have affected the sentiments of investors heavily, and thus is growing concern amongst ECB and
US Fed, which has led to rise in global prices of assets
 Necessary steps to implement Foreign Direct Investment(FDI) policy were taken to inject capital in the economy
 Non-food Manufactured Products inflation has raised from 5.1% in April to 5.6% in august  Rationalisation of LPG and Fuel Subsidy is one of the most important decision taken in this financial year
 Trade Deficit has reduced
Global economy has shown some signs of stabilisation, including US, UK and many emerging economies are also returning to high growth situation
 Capital goods production showed a positive sign of growth of 7.5% after 13 months successive decline
 Even non-Manufactured goods inflation was eased. So this showed a positive sign by the end of year 2012
 RBI injected close to Rs.232 billion in the economy with the help of Open Market
Operations
Though global financial conditions have improved, no such growth could be observed in global economy
 India’s GDP of 4.5% was weakest in last 15 quarters
 Capital goods production continued to contract as per Jan 2013
 Retail Inflation continued to grow with a CPI inflation of 10.9%
 RBI is suffering from liquidity deficit, higher than normal level
 RBI has continued Open Market Purchasing of Rs.200 billion which has ensured adequate credit flow to the economy