Second Quarter Review of Monetary Policy 2012-13 Press Statement by Dr. D. Subbarao, Governor, Reserve Bank of India - আরবিআই - Reserve Bank of India
Second Quarter Review of Monetary Policy 2012-13 Press Statement by Dr. D. Subbarao, Governor, Reserve Bank of India
"First of all, on behalf of the Reserve Bank, I want to welcome you all to this Second Quarter Review of Monetary Policy for 2012-13. 2. A short while ago, we put out the Second Quarter Review. Based on an assessment of the current macroeconomic situation, we have decided to:
3. There is no change in policy interest rate. Accordingly, the repo rate under the liquidity adjustment facility remains at 8.0 per cent. 4. Consequently, the reverse repo rate under the liquidity adjustment facility (LAF), determined with a spread of 100 basis points below the repo rate, will continue at 7.0 per cent, and the marginal standing facility (MSF) rate, determined with a spread of 100 bps above the repo rate, at 9.0 per cent. Considerations Behind the Policy Move 5. Let me begin with an explanation of the rationale behind this monetary policy action. 6. The decision to cut the CRR and keep the policy interest rate unchanged draws from our assessment of the evolving liquidity situation and the growth-inflation dynamic.
Monetary Policy Stance 7. The policy document spells out the three broad contours of our monetary policy stance. These are:
Guidance 8. As in the past, we have also given guidance for the period forward. 9. In reducing CRR, the Reserve Bank intended to pre-empt a prospective tightening of liquidity conditions, thereby keeping liquidity comfortable and supportive of growth. The policy stance anticipates the projected inflation trajectory which indicates a rise in inflation over the next few months before easing in the last quarter. While there are risks to this trajectory, the baseline scenario suggests a reasonable likelihood of further policy easing in the fourth quarter of this fiscal year. Let me add though that this guidance will, however, be conditioned by the evolving growth-inflation dynamic. Expected Outcomes 10. We expect that today’s policy actions, and the guidance that we have given, will result in the following three outcomes:
Global and Domestic Developments 11. As always, our policy action has been based on a careful assessment of the global and domestic macroeconomic situation. Let me comment first on the global economy. Global Economy 12. Over the last quarter, policymakers around the world have confronted increasingly difficult challenges. Globally, even as the growth momentum has slowed, governments have had to manage the balance between fiscal consolidation and growth stimulus amidst visible signs that the two objectives are in conflict with each other. As the advanced economies deal with these tensions and global demand conditions weaken, emerging and developing economies are also slowing down. 13. Liquidity infusions by central banks in advanced economies during the quarter have contributed to some stability in global financial markets. It is important to note though that liquidity infusions are only a stop-gap measure intended to maintain financial stability and arrest further downturn. They cannot substitute for robust structural solutions that can return the advanced economies to the path of recovery. At this stage, growth risks have risen and could well overwhelm the positive effects of enhanced liquidity. Moreover, notwithstanding some muted softening recently, commodity prices are still at elevated levels. Consequently, there is a significant risk of liquidity-driven price increases. Even as the global recovery process moves forward, the months ahead will be a period of heightened uncertainty for the global economy. Indian Economy 14. Let me now turn to the domestic macroeconomic situation. Growth decelerated over four successive quarters, from 9.2 per cent year-on-year in the fourth quarter of 2010-11 to 5.3 per cent in the fourth quarter of 2011-12. In the first quarter of this year, growth was marginally higher at 5.5 per cent. This slight improvement in GDP growth in the first quarter was mainly driven by growth in construction, and supported by better than expected growth in agriculture. On the demand side, the growth of gross fixed capital formation decelerated, while the slowdown in growth of private consumption expenditure continued. The external demand conditions and crude oil prices also remained unfavourable, adversely impacting net exports. 15. Over the last quarter, global risks have increased and domestic risks have become accentuated owing to halted investment demand, moderation in consumption spending and continuing erosion in export competitiveness accompanied by weakening business and consumer confidence. The industrial outlook remains uncertain. Notwithstanding the improvement in rainfall in the months of August and September, the first advance estimates of the 2012 kharif production are about 10 per cent lower than last year’s production. 16. On the basis of the above considerations, the baseline projection of GDP growth for 2012-13 is revised downwards from 6.5 per cent to 5.8 per cent. Inflation 17. Moving on to inflation. Headline WPI inflation remained sticky, at above 7.5 per cent on a y-o-y basis, through the first half of the current year. Furthermore, in September there was a pick-up in the momentum of headline inflation owing to the increase in fuel prices and elevated price levels of non-food manufactured products. This is, in part, attributable to some suppressed inflation in the form of earlier under-pricing being corrected. However, even after adjusting for this, the momentum remains firm. 18. While WPI primary food articles moderated since July due to the softening of prices of vegetables, prices of cereal and protein items edged up. WPI food products inflation increased in September, mainly due to the firming up of the prices of sugar, edible oils and grain mill products. 19. Fuel group inflation registered a significant rise in September, reflecting the sharp increase in prices of electricity effected from June, the partial impact of the increase in prices of diesel in mid-September and significant increase in non-administered fuel prices on account of rising global crude prices. 20. Non-food manufactured products inflation was persistent at 5.6 per cent through July-September. This upside pressure was a result of firm prices of metal products and other inputs and intermediates, especially goods with high import content due to a depreciating rupee. 21. Consumer price inflation, as measured by the new CPI, remained elevated, reflecting the build-up of food price pressures. CPI inflation excluding food and fuel groups ebbed slightly during June-September, from double digits earlier. 22. Looking ahead, the path of inflation will be shaped by two sets of counteracting forces.
23. Taking the above factors into consideration, the baseline projection for headline WPI inflation for March 2013 is raised to 7.5 per cent from 7.0 per cent indicated in July. Importantly, inflation is expected to rise somewhat in the third quarter before beginning to ease in the fourth quarter. Monetary and Liquidity Conditions 24. Let me now move on to monetary and liquidity conditions. Money supply (M3), deposit and credit growth have so far trailed below the indicative trajectories of the Reserve Bank indicated in the April Policy and reiterated in the July Review. Deposit growth has decelerated with the moderation in interest rates, especially term deposits. Credit growth has ebbed with the slowdown in investment demand, especially with regard to infrastructure, and lower absorption of credit by industry, in general. Keeping in view the developments during the year so far and the usual year-end pick-up, the trajectories of the monetary aggregates for 2012-13 are projected at 14 per cent for M3, 15 per cent for deposit growth and 16 per cent for growth of non-food credit. 25. Liquidity conditions, as reflected in the average net borrowing under the LAF at `486 billion during July-September, remained within the comfort zone of (+/-) one per cent of NDTL. However, liquidity conditions tightened in October, mainly on account of the build-up in the Government’s cash balances and the seasonal increase in currency demand, taking the average LAF borrowing to `871 billion during October 15-25, well above the band of (+/-) one per cent of NDTL Risk Factors 26. Now, let me highlight the risks to our growth and inflation projections:
Developmental and Regulatory Policies 27. This review also includes developmental and regulatory policies which focus on carrying forward the initiatives taken for strengthening the financial system and for efficiently providing financial services to the widest sections of society. Let me briefly indicate some of the important initiatives in this regard. 28. I will begin with financial markets and market infrastructure. Some important measures contained in the policy are the following:
29. Now let me move on to initiatives for financial inclusion, credit delivery and customer service. Drawing on extensive consultation with banks, we have rationalised the guidelines on priority sector lending. Important initiatives in this regard are the following:
30. As regards the cooperative sector, scheduled urban cooperative banks (UCBs) have been allowed to undertake repo transactions in corporate bonds. 31. Another important step relates to micro and small enterprises. The definition of sickness of these enterprises is modified to facilitate early rehabilitation of potentially viable sick units and to lay down a procedure for assessing viability of sick units in the sector. 32. Moving on to regulation and supervision, we are carrying forward the implementation of Basel III capital regulations by issuing draft guidelines on capital requirements for bank exposures to central counterparties by mid-November 2012 and on composition of capital disclosure requirements by end-December 2012. 33. Given the larger objectives of financial stability, and keeping in view international best practices to ensure that banks have sufficient provisioning buffer, the provision for restructured standard accounts is being raised from the existing 2 per cent to 2.75 per cent. 34. To address the issue of rise in NPAs and restructured advances of banks, and with a view to improving effective information sharing among banks on credit, derivatives and unhedged foreign currency exposures, banks are being advised to put in place, by end-December 2012, an effective mechanism for information sharing. Any sanction of fresh loans/ad-hoc loans/renewal of loans to new or existing borrowers with effect from January 1, 2013 should be made only after obtaining/sharing necessary information. 35. Turning to unhedged foreign currency exposures of corporates, which is a source of risk to them as well as to the financing banks and the financial system, we are advising banks to put in place a proper mechanism to rigorously evaluate the risks arising out of unhedged foreign currency exposures of corporates, and price them in the credit risk premium. Banks are also being advised to consider stipulating a limit on the unhedged position of corporates on the basis of bank’s Board-approved policy. 36. We are in the process of strengthening the regulatory framework for dealing with Systemically Important Financial Institutions (SIFIs) which may come under stress and may require resolution. Accordingly, the Government and the Reserve Bank are setting up a High Level Working Group to recommend a comprehensive resolution regime for all types of financial institutions in India. 37. Before I close, let me note that the persistence of inflation pressures, even as growth has moderated, remains a key challenge. Of particular concern is the stickiness of core inflation, mainly on account of supply constraints and the cost-push of rupee depreciation. Consequently, managing inflation and inflation expectations must remain the primary focus of monetary policy. A central premise of monetary policy is that low and stable inflation and well-anchored inflation expectations contribute to a conducive investment climate and consumer confidence, which is key to sustained growth on a higher trajectory in the medium-term. 38. Accordingly, over the past few quarters, monetary policy had to focus on inflation, even as growth risks have increased. As recent policy initiatives by the Government start yielding results in terms of revitalising activity, they will open up space for monetary policy to work in concert to stimulate growth. However, in doing so, it is important not to lose sight of the primary objective of managing inflation and inflation expectations. 39. Thank you for your attention. On behalf of the Reserve Bank, my best wishes to everyone for a Happy Diwali. Alpana Killawala Press Release : 2012-2013/713 |