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Marking a reversal from the dear money policy that had seen rise of 375 basis points in the policy rate over March 2010- October 2011, and a pause in the mid-quarter review (MQR) in December 2011, RBI reduced the repo rate under the liquidity adjustment facility (LAF) by 50 basis points from 8.5 per cent to 8.0 per cent with immediate effect in its annual policy statement announced by Dr Subbarao, Governor, on 17 April. With this, reverse repo rate stands at 7 per cent and MSF rate at 9 per cent. RBI has also raised the borrowing limit of scheduled commercial banks under the marginal standing facility (MSF) from 1 per cent to 2 per cent of their net demand and time liabilities (NDTL). The measures should lead to some decline in bank lending rates, depending on the monetary transmission effects of the apex bank's signaling gesture. The Bank Rate remains at 6 per cent, and after two reductions on 28 January and 10 March last adding to 125 basis points CRR is 4.75 per cent

The stance of monetary policy would be to adjust policy rates to levels consistent with the current growth moderation, guard against risks of demand-led inflationary pressures re-emerging, and provide a greater liquidity cushion to the financial system.

GDP growth is projected at 7.3 per cent for 2012-13, against 6.9 per cent assessed for the completed fiscal. Keeping in view the domestic demand-supply balance, the global trends in commodity prices and the likely demand scenario, inflation would likely remain range bound during 2012-13 with the year-end rate projected at 6.5 per cent. Consistent with growth and inflation projections, M3 growth for the year for policy purposes is expected to be 15 per cent. Consequently, aggregate deposits of SCBs are assessed to grow by 16 per cent and nonfood credit by 17 per cent. These numbers are indicative predictions and not targets, RBI underlines.

FLOW OF FINANCIAL RESOURCES TO THE COMMERCIAL SECTOR (` BILLION)
	2009-10	2010-11	2011-12 P
Adjusted Non-food Bank Credit (NFC)	4,786	7,110	6,764
i) Non-Food Credit	4,670	6,815	6,525
ii) Non-SLR Investments by SCBs	117	295	239
Flow from Non-banks	5,850	5,286	5,894
Domestic Sources	3,652	2,956	3,132
Public issues by non-financial entities	320	285	70
Gross private placements by non-financial entities	1,420	674	401
Net issuance of CPs subscribed to by non-banks	261	172	738
Net credit by housing finance companies	285	384	356
NABARD, NHB, SIDBI & EXIM Bank	338	400	346
Non-deposit NBFCs	607	679	926
LIC	422	361	295
Foreign Sources	2,198	2,330	2,762
External Commercial Borrowings / FCCBs	120	555	504
ADR/GDR excl banks and FIs	151	92	27
Short-term credit from abroad	349	502	262
FDI to India	1,578	1,181	1,969
Total Flow of Resources	10,636	12,396	12,659

Domestically, the state of the economy is a matter of growing concern, RBI opines. Though inflation has moderated in recent months, it remains sticky and above the tolerance level, even as growth has slowed. Significantly, these trends are occurring in a situation in which concerns over the fiscal deficit, the current account deficit and deteriorating asset quality loom large. In this context, the challenge for monetary policy is to maintain its vigil on controlling inflation while being sensitive to risks to growth and other vulnerabilities. The apex bank has cautioned that the consideration of sustainable economy growth sans demand-side inflationary pressures, would inherently limit the space for further reduction in policy rates.

Risk factors

• The outlook for global commodity prices, especially of crude oil, is uncertain.
  
• The fiscal deficit of the Central Government has remained elevated since 2008-09. The fiscal slippage in 2011-12 was also significantly high. Elevated government borrowing tends to crowd out non-food credit by banks to private sector.
  
• With global capital flows to emerging markets projected at lower levels in 2012, financing of CAD will continue to pose a major challenge.

In credit delivery and financial inclusion, RBI has proposed roadmap for provision of banking services in villages with population below 2,000, exposure norms for UCBs in housing, real estate and commercial real estate, licensing of new UCBs, abolition of foreclosure charges/prepayment penalty in floating rate housing loans, etc.

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