Wednesday, April 18, 2012

Monetary Policy Statement for 2012-13 Press Statement by Dr. D. Subbarao Governor, RBI

RBI have decided to:
1. reduce the repo rate under the liquidity adjustment facility (LAF) by 50 basis points. The repo rate will accordingly drop from 8.5 to 8.0 per cent.

2. Consequent to this, the reverse repo rate under the LAF, determined with a spread of 100 basis points below the repo rate, gets calibrated to 7.0 per cent. Similarly, the marginal standing facility (MSF) rate, which has a spread of 100 bps above the repo rate, stands adjusted to 9.0 per cent.

3. In order to provide greater liquidity cushion, RBI also decided to raise the borrowing limit of scheduled commercial banks under the marginal standing facility (MSF) from one per cent to two per cent of their net demand and time liabilities (NDTL).


The decision to ease the monetary policy has been informed by two broad considerations.

I.Growth decelerated significantly to 6.1 per cent in the third quarter of last year, although it is expected to have recovered moderately in the fourth quarter. Based on current assessment, the economy is clearly operating below its post-crisis trend.

II. Consideration that shaped the policy decision is the decline in inflation. Headline WPI inflation which remained above 9 per cent for nearly two years has moderated significantly to below 7 per cent by March 2012. More importantly, non-food manufactured products inflation has dropped from a high of 8.4 per cent in November 2011 to 4.7 per cent in March 2012, actually coming below 5 per cent for the first time in two years.

Risk Factors:- Highlight the risks to our indicative projections of growth and inflation for 2012-13:

First, a major risk to our growth and inflation projections stems from the outlook for global commodity prices, especially of crude oil. Although upside risks to oil prices from the demand side are limited, geo-political tensions are a concern. Any disruption in supplies is likely to lead to further increase in crude oil prices.

The second risk emanates from the fiscal situation. Even though the Budget has proposed a reduction in the fiscal deficit in the current year, there are several upside risks. Any slippage in the fiscal deficit will have implications for inflation.

Third, the large Government borrowing budgeted for 2012-13 has the potential to crowd out credit to the private sector. If that happens, the supply response required to accelerate growth could be inhibited.

Fourth, the financing of the current account deficit will continue to pose a major challenge.

And finally structural imbalances in protein-rich foods persist, and consequently, food inflation is likely to remain under pressure.

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