14 Dec 2012: Review of Indian monetary policy

Review of the Q2 Monetary Policy of India

Recent Actions:

  • Cutting Cash-reserve-ratio (CRR) by 25 bps to 4.25%.
  • Maintaining the policy rate at 8%.
  • Continuing with Reverse-repo at 100 bps below repo at 7%.



  • Increasing immediate liquidity.
  • Moderation of WPI, which has come down to a headline average of 7.5% from its peak of 10.9% in April 2010.


Monetary Policy Stance:

  • Managing liquidity, and improving the availability of credit to stimulate growth.
  • Reinforcing the positive impact of government policy’s actions on growth, as inflation moderates.
  • Maintaining an environment for containing and anchoring inflation.


Expected Outcomes:

  • Added liquidity resulting from CRR reduction to turnaround credit growth.
  • Growth in production to be reinforced through and resulting in inflation moderation.
  • Anchoring medium-term inflation.


Macroeconomic Situation: Growth has been decelerating for 4 continuous quarters, from 9.2% YoY in Q4 2010-11 to 5.3% YoY in Q4 2011-12. Global and domestic risks have been accentuated by halted investment demand, reduction in consumption spending and erosion in export competitiveness. The headline WPI was given undesired momentum by the rise in fuel prices, and consequently power generation. This was not helped by rising food-prices due to a poor and delayed monsoon this year. The headline WPI remains sticky above 7.5% YoY. Consumer Price inflation (CPI) remained high, although CPI excluding food and fuel items dropped down from its double digits level. WPI inflation projections have been revised to 7.5% for June 2013 from 7% owing to persistent supply constraints, and price pressures. Also, correction of under-pricing of certain products will reveal suppressed inflation, which might result in increased overall inflation.


Monetary and Liquidity Situation: M3 has trailed below indicative trajectories of the RBI, indicated, and then re-iterated in April and July policies. Deposit growth has also decelerated with moderation in interest rates. Credit growth has also ebbed due to the lack of investment demand, especially in the infrastructural industry. The trajectories of the monetary aggregates for 2012-13 are projected at 14% for M3 and 15% for food growth.


Risk Factors:

  • Global macroeconomic conditions comprising low confidence in exports, slow business conditions and hesitation to invest in Indian public debt.
  • High prices of global commodities.
  • Unpredictable behaviour of food inflation.
  • Persistent increase in rural and urban wages despite the lack of production growth.
  • The size of the twin deficits: current account deficit and fiscal deficit.
  • While money is being injected into the system, this must be accompanied by growth in production and supply. Excess liquidity could hence, aggravate inflation. The core inflation remains high, due to supply constraints also. 

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