Raised projection for GDP at 8.5% & inflation at 6%
In first quarter meet, RBI hiked repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points from 5.5 per cent to 5.75 per cent with immediate effect and reverse repo rate by 50 bps to 4.50%. However, CRR retained at 6%.
The monetary policy action expected to moderate inflation. RBI trying to reduce the volatility of short term rates in a narrow corridor.
This First Quarter Review is being made in a macroeconomic environment
that has changed significantly since April policy announcement. At that
time, there was some optimism about the sustainability of the global
recovery, however modest the pace may be. This was reinforced by the International Monetary Fund
(IMF) forecasts published earlier this month, which suggested that
global growth would be marginally higher than their April 2010 projection. While most of that would come from emerging market economies
(EMEs), the advanced economies would hold steady. However, in the
aftermath of the Greek sovereign debt crisis and other visible soft
spots in Europe and the US, there is renewed uncertainty about the
sustainability of the recovery.
The dominant concern that has shaped the monetary policy stance in this review is high inflation. Even as food price inflation and, more generally, consumer price inflation have shown some moderation, they are still in double digits. Non-food inflation
has risen and demand side pressures are clearly evident. With growth
taking firm hold, the balance of policy stance has to shift decisively
to containing inflation and anchoring inflationary expectations.
Taking into account the progress of monsoon so far and the prevailing
global macroeconomic scenario, for policy purposes, the baseline projection of real GDP growth for 2010-11 is revised to 8.5 per cent, up from 8.0 per cent
with an upside bias as indicated in April 2010 policy statement. Taking
into account the emerging domestic and external scenario, the baseline projection for WPI inflation for March 2011 has been raised to 6.0 per cent from 5.5 per cent as indicated in the April policy statement.
The current year-on-year money supply (M3) growth at 15.3 per cent is below the indicative projection of 17.0 per cent, non-food credit growth at 22.3 per cent was marginally higher than the indicative projection of 20.0 per cent. It is expected that even with the higher growth projection,
monetary aggregates will evolve along the projected trajectory
indicated in the April policy statement. Accordingly, the M3 and
non-food credit growth projections for 2010-11 have been retained at 17 per cent and 20 per cent respectively.
