Survey Notes on Monetary Developments
The Economic Survey 2010-11 says that to respond the global financial crisis , which began from mid-September 2008, the RBI adopted an accommodative monetary policy stance that helped instill confidence among market participants and ensure that the economy recovered as quickly as possible.
The economy exhibited acceleration in the momentum of recovery during the course of 2009-10. Despite a deficient monsoon, the expansionary monetary and fiscal stance adopted in response to the global crisis contributed to the recovery.
The headline inflation spiked in the second half, initially driven by high food prices but turning more generalized over successive months. To combat food inflation and to combat the risk of impinging on inflationary expectations alongside the consolidating recovery, the RBI stated a clear shift in stance from ‘managing the crisis’ to ‘managing the recovery’ and announced the first phase of exit from the expansionary monetary policy in its Second Quarter Review of October 2009 by terminating some sector-specific facilities and restoring the statutory liquidity ratio (SLR) of scheduled commercial banks (SCBs) to its precrisis level.
During 2010-11 the RBI raised the policy rates six times whereby the repo rate under the LAF has cumulatively been increased by 175 basis points (bps) to stand at 6.5 per cent and the reverse repo rate by 225 bps to 5.5 per cent. The RBI has moreover retained the cash reserve ratio (CRR) at 6 per cent of the net demand and time liabilities (NDTL) of banks.
Thus, the survey notes, that in 2010-11, the persistently high inflation above the comfort level of the RBI , together with growth buoyancy, necessitated that the monetary policy focus remain on containing inflation and inflationary expectations.
The survey notes that underlying growth momentum of the Indian economy remains strong. Even as inflation has moderated, it remains significantly above the comfort level of the RBI. Moreover, risks to inflation remain on the upside, both from domestic demand and higher global commodity prices. There is, therefore, a need for continued vigilance on the inflation front against the build-up of demand-side pressures. A major challenge for the RBI in recent times has been liquidity management. It is the RBI’s endeavour to alleviate the liquidity pressure in a manner consistent with the monetary policy stance of containing inflation and anchoring inflationary expectations.
List of Topics : Economic Survey 2010-11
Video from our Channel
Tags:Economic Survey 2010-11