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You are here : IndiaNotes >> Research & Analysis >> Economy Watch >> Monetary Policy

First Quarter Review of Monetary Policy 2012-13: RBI reiterates its past stance

Shilpa Stock Broker | 31 Jul, 2012  | Follow Author | Add to my Favourites 


First Quarter Review of Monetary Policy 2012-13

Monetary Measures:


- RBI keeps policy rates unchanged for the second time since June giving priority Inflation over Industry growth.
- RBI Cuts SLR To 23% from 24% effective August 11
- Policy rate status: CRR stands at 4.75% (Unchanged), Repo rate stands at 8.00% (Unchanged), Reverse Repo rate stands at 7.00% (Unchanged) and SLR reduced from 24% to 23% effective from August 11.

Highlights:
The Reserve Bank of India left interest rates unchanged for the second time since June, in line with expectations, while cutting its growth forecast and lifting its inflation outlook as economic conditions deteriorate.

Risk Factors:
Following are the key risk cause to lower down GDP growth expectation from 7.3% to 6.5%:
- Deficit and Weak monsoon
- Growth decelerated significantly to 6.5% in 2011-12
- Increased global risk
- WPI inflation inches up
- Uncertain Crude Price
- Current levels of the Current Account Deficit and the fiscal deficit

Global Economy:
- The global economy is slowing down. Among the BRICS countries, growth in China, Brazil and South Africa fell in Q1
- Among the BRICS countries, inflation fell significantly in China and Russia. It also eased in Brazil and South Africa. Even as growth in India is slowing, it is clearly an outlier insofar as inflation is concerned
- In recent weeks, renewed concerns about Greece and the need for greater collective support to Spain and Italy have amplified risks

Domestic Economy:
- GDP growth decelerated over four successive quarters from 9.2% in Q4 of 2010-11 to 5.3% in Q4 of 2011-12.
- Significant slowdown in industrial growth as well as deceleration in services sector activity pulled down the overall GDP growth to 6.5% for 2011-12, below the Reserve Bank’s baseline projection of 7%.
- Growth in IIP decelerated from 8.2% in 2010-11 to 2.9% in 2011-12. Further, IIP growth during April-May 2012, at 0.8%, was significantly lower than the expansion of 5.7% registered in the corresponding period of last year.

Conclusion:
The Reserve Bank decided to pause even in the face of slowing growth. Major elements are:
- To anchor inflation expectations;
- To support a sustainable growth path over the medium-term; and
- To continue to provide liquidity to facilitate credit availability to productive sectors.

The next Mid-Quarter Review of Monetary Policy for 2012-13 will release on Monday, September 17, 2012.

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