RBI monetary policy 2011-12 – A quick glance

By BankBazaar.com | May 4, 2011

The RBI governor Mr. D. Subbarao today announced the Annual Policy statement for the year 2011-12. Here’s a look at what the document contains.

“The annual policy has been created under very different set of conditions as compared to the last year” were the opening lines of the Governor.

According to him the new policy has been formulated on the basis of 3 factors

1.    The ever increasing commodity prices

2.    Fluctuations in Inflation

3.    Expectations of demand reducing

The Projections: Global

The experts believe that global growth will be lower in the coming year at around 4.4% as compared to 5% last year. The issue of concern will be that growth even in emerging economies will be lesser due to monetary tightening and commodity prices.

There are also expectations that inflation across the globe might rise to around 4.5% from3.7% last year. The issue could be even worse in emerging economies as they have to tackle both rising commodity prices and rising demand!

The projections: India

Growth will be lesser than last year due to a result of multiple factors including the RBI’s tightening of monetary policy. This could be seen in the very near future when the first quarter results are announced.

With global economy slowing down we could have a reduction in external demand too. Although oil prices have gone up, the same has not yet been completely passed on to the end user, which means that inflation as we know today is only in a suppressed form. The same story is repeated in the electricity domain too. Once these are actually passed on to the end user we will know the real state of inflation.

The biggest threat to the Indian economy right now seems to be from global commodity prices and food inflation in the country. Based on these factors the RBI has formulated the policy for the coming year.

“The Policy Stance”- What the RBI has proposed to do in the coming year:

  • The RBI has proposed to maintain an interest rate situation which could help to moderate inflation as well as keep inflation under control.
  • Focus on ensuring stability of prices so that growth can be maintained at least in the medium future.
  • The RBI will also try to manage liquidity to maintain a sense of equilibrium.

To ensure that the above 3 targets are met the RBI has come up with various monetary measures as below:

1.    Reverse Repo has been retired:

As compared to the current state where the RBI announces two rates: one for the rate at which banks borrow from RBI and the other for the rate at which RBI will borrow from banks, in the future, there will be only one rate the Repo rate. The reverse repo will be calculated as a constant 100 points lesser than Repo rate.

2.    Banks can now borrow overnight at a new rate called Marginal Standing Facility which will be 100 basis points above the Repo rate.

3.    The Repo rate has been fixed currently at 7.25% which is 50 basis points above yesterday’s rate. Hence the Reverse repo will be 6.25% and MSF will be 8.25%

4.    The bank rate has been maintained at 6%. This is expected to ensure that there is not very high reactionary fluctuation in the markets.

5.    CRR has also been maintained at the current 6% of net demand and time liabilities.

6.    Hike in savings bank rate: there is cheer for small investors as the RBI has hiked the Savings deposit interest rate to 4% with immediate effect. This could change once there is a conclusion to the ongoing debate on deregulation of the Savings bank interest rates.

We can look forward to a controlled state of affairs: both growth and inflation being predominantly in a state of control!

All information including news articles and blogs published on this website are strictly for general information purpose only. BankBazaar does not provide any warranty about the authenticity and accuracy of such information. BankBazaar will not be held responsible for any loss and/or damage that arises or is incurred by use of such information. Rates and offers as may be applicable at the time of applying for a product may vary from that mentioned above. Please visit www.bankbazaar.com for the latest rates/offers.

Leave a Reply

Your email address will not be published.