Monetary Policy Review
June 2012
Monetary and Liquidity Measures
On the basis of an assessment of the current macroeconomic situation, it has been decided to:
> keep the cash reserve ratio (CRR) of the scheduled banks unchanged at 4.75 per cent of their net demand and time liabilities; and
> keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0 per cent.
consequently, the reverse repo rate under the LAF will remain unchanged at 7.0per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 9.0 per cent.
2. Since the Reserve Bank's Annual Policy statement in April, global macroeconomic and financial conditions have deterioted. At the same time, the domestic macroeconomic situation too raises several deepening concerns. While growth in 2011-2012 has moderated significantly, headline inflation remains above levels consistent wit
h sutainable growth. Importantly retail inflation is also on an uptrend.
3. The Reserve Bank had frontloaded the policy rate reduction in April with a cut of 50 basis points. This decision was based on the premise that the process of fiscal consolidation critical for inflation management would get under way, along with other supply-side initiatives. Our assessment of the current growth inflation dynamic is that there are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small. Consequently, further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate infationary pressures.
Global Economy
4. The euro area soveriegn debt problem has continued to wiegh on the global recovery. After a brief phase of relative calm reflecting the large liquidity injection by the European Central Bank (ECB), renewed concerns have arisen about a sustainable solution to the sovereign debt problem and the increasing vulnerability of the banking sector. Consequently, risk aversion has increased. Recent data suggest that US economic recovery is weakening. Growth in major emerging and developing economies (EDEs)is also moderating.
