CII Communique - December, 2010

economy
review
Second Quarter Review of the
Monetary Policy 2010
The RBI’s second quarter review of monetary
policy has been influenced by the mixed indications of
persistent sluggishness in the advanced economies and
positive signals emanating from the Emerging Market
Economies (EMEs). The weak recovery and large
unemployment in advanced economies have raised
concerns about the sustainability of the global recovery.
It has led to the downward revision of world GDP growth
by the IMF to 4.2% in 2011 as compared with 4.8% in
2010. The second round of quantitative easing by the
advanced economies to further stimulate private demand
has increased the risk for EMEs, including India of
receiving high capital inflows and firming up of global
commodity prices.
On the domestic front, the monetary policy stance
has been influenced by persistently high inflation.
Headline inflation remained significantly above the
RBI’s medium-term target notwithstanding some
recent moderation. Food inflation has declined only
moderately post-monsoon, as inflation in protein-rich
items such as pulses and eggs, meat and fish, has
remained high. Although primary food inflation plunged
from 21.4% in May 2010 to 15.7% in September 2010,
it still remained elevated. Inflation in non-food items
(excluding food products and food articles) rose sharply
from -2.9% in September 2009 to 7.8% in September
2010 and in non-food manufactured products from
-2.0% to 5.0%.
The RBI has stated that inflation in the second half of
the current fiscal will be shaped by:
• Evolution of food inflation
• Movements in global commodity prices
• Potential build up in the demand side pressure with
sustained growth resulting in capacity constraints in
many industries
On the basis of current trends, the RBI has maintained
its baseline projection for WPI inflation for 2010-11
unchanged at 6.0% according to the old series; and
5.5% as per the new series. Given the present slow
down in industrial growth and inflation trends, the RBI
has indicated that the possibility of a further hike in
policy rates in the immediate future is remote.
In order to contain inflationary expectation, the RBI has
further raised the repo and reverse repo rates by 25
basis points each to 6.25% and 5.25% respectively in
the second quarter policy. Liquidity has become tighter
and the Reserve Bank has been a net lender in the LAF
since September.
Surplus / Deficit in Liquidity Adjustment
Facility (Rs crore)
Inflation Rate (Y-o-Y)
Source: CMIE and RBI
* Data is from 1- 16 November 2010
Source: CMIE
The growth in money supply (M3) remained subdued
at 15.2% on 8 October 2010 compared to the target
of 17.0% for 2010-11. This lower growth in M3 can
be attributed to the sluggishness in deposits growth
(particularly long term deposits). This has resulted
14 | December 2010 Communiqué