Glimpse of RBI Annual Policy -2010-11

 Following are the highlights of the Reserve Bank of India's Annual Policy Statement for 2010-11

MAJOR HIGHLIGHTS

· Hikes reverse repo, repo rate, CRR by 25bps each

· Reverse repo, repo rate hikes with immediate effect

· CRR hike effective from Apr 24

· CRR hike to impound 125 bln rupees from banks

· FY11 GDP growth projection at 8.0% with upside bias

· March end inflation projection at 5.5%

· FY11 banks' credit growth projection at 20.0%

· FY11 banks' deposit growth projection at 18.0%

· FY11 money supply growth projection at 17.0%

STANCE


· Hike in policy rates, CRR to help contain inflation

· Hike in policy rates, CRR to anchor inflationary expectations

· Measures to sustain recovery process

· Govt borrow needs, private credit demand will be met

· Hikes to align policy tools with evolving state of econ

· To closely monitor macro events, prices; take warranted steps

· Econ firmly on recovery path, industrial growth broad based

· India economy resilient, recovery consolidating

· FY11 econ growth to be higher, more broad-based vs FY10

· Lower policy rates can complicate inflation outlook

· Lower policy rates also impair inflationary expectations

· Despite 25bps hike in rates, real policy rates still negative

· Need to normalise policy rates in calibrated manner

· Inflationary pressures "accentuated" in recent period

· Inflation getting increasingly generalised

· Capacity constraints to re-emerge as econ growth rises

· Must ensure demand-side inflation does not become entrenched

· FY11 fresh govt bond issuances 36.3% higher vs FY10

· FY11 fresh govt bond issuances "a dilemma"

· Policy considerations demands liquidity be curbed

· Govt borrow needs supportive liquidity conditions

· Need to absorb liquidity without hurting govt borrow plan

· To respond swiftly, effectively to inflationary expectation

· To actively manage liquidity, ensure private credit demand is met


INFLATION

· Significant changes in drivers of inflation in recent months

· Overall food inflation high despite seasonal ease

· Rise in global commodity prices upside risk to inflation

· Household inflation expectations remain at elevated level

· Demand pressures may rise as recovery gains momentum

· Monsoon prospects unclear, blur FY11 inflation outlook

· Volatile crude prices cloud FY11 inflation outlook

· To ensure price stability, anchor inflationary expectations

· To monitor overall, disaggregated components of inflation

· keeps medium-term inflation objective of 3.0%

· An unfavourable monsoon may exacerbate food inflation

· Unfavourable 2010 monsoon may add to fiscal burden


GROWTH

· GDP projection assumes normal monsoons

· GDP projection also assumes good industrial, services growth

· Industrial growth to take firmer hold going forward

FISC

· Fiscal prudence to avoid crowding out private credit demand

· Fiscal prudence must shift to structural improvements

· Govt borrow "very large", can pressure interest rates .
GLOBAL

· Pace of global econ recovery remains uncertain

· Uncertain global econ recovery downside risk to India GDP

· Trade, financial linkages to other economies may impact India GDP

· Commodity price seen up more if global recovery gain momentum

· Rise in global commodity prices may up inflation pressure

· Expansionary fiscal policy may not be unwound in advanced economies

· Expansionary policies may trigger large FX flows to India

· Excessive flows challenge to FX rate, monetary mgmt

· FX rate policy not guided by pre-announced target

· Keep flexibility to intervene in FX market to manage volatility

· Need to be vigilant volatile FX rate movements


MARKET


· RBI panel to mull single point reporting for OTC FX derivatives

· To launch reporting platform for secondary deals of CDs, CPs

· Asked FIMMDA to develop CD, CP reporting platform

· To allow banks to purchase non-SLR bonds by infra companies in HTM

· OKs bourses to launch plain vanilla dollar/rupee options

Thanks