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Q1 REVIEW OF FY11 MONETARY POLICY
The first quarter review of Annual Monetary Policy Statement released on July 27 has announced increase in the repo rate by 25 basis points to 5.75 per cent, and in reverse repo rate by 50 basis points to 4.50 per cent. Both measures forming part of the Liquidity Adjustment Facility (LAF), which conceptually sets the corridor for call money rates, came into force with immediate effect. CRR and bank rate remained unchanged at 6 per cent.

In a major but welcome development, the apex bank has decided to henceforth undertake mid-quarter reviews, in addition to the usual quarterly assessment of annual monetary policy. As per schedule, mid-quarter reviews will be in June, September, December and March. Midquarter reviews, warranted in view of dynamic macroeconomic conditions, formalises what is already an informal, internal exercise, RBI states.

Projections
GDP growth projection for 2010- 11 has been revised upward from 8 per cent to 8.5 per cent (with an upward bias), which factors in the progress of monsoon, prevailing global macroeconomic scenario, better industrial production and its favourable impact on the services sector. While domestic drivers of growth are robust, if the global recovery slows down, it will affect all EMEs, including India, through exports, financing and confidence channels, the Review maintains.

Year-on-year growth in gross bank credit
	Rs crore		%
	May 22, 2009	May 21, 2010	May 22, 2009	May 21, 2010
Non-food gross bank credit	3,83,512	4,63,235	17.6	18.1
Agriculture and allied activities	65,345	69,362	24.7	21
Industry	1,81,932	2,68,27	21.2	25.8
Personal loans	24,489	36,032	4.6	6.5
Services	1,11,746	89,56	21.4	14.1
Memo items
Priority sector	1,46,173	1,52,429	19.1	16.7
Industry	1,81,932	2,68,274	21.2	25.8
Construction	11,671	6,123	44.7	16.2
Infrastructure	71,384	1,21,829	35.1	44.3

The baseline projection for WPI inflation for March 2011 has been raised from 5.5 per cent to 6 per cent, though the outlook would be shaped by

• Spatial and temporal distribution of rainfall in the remaining period of southwest monsoon 2010;
  
• Global energy and commodity prices, which have been showing distinct signs of softening over the past few weeks as expectations of global growth have moderated. If energy prices continue to decline, this will offset the inflationary impact of the recent fuel price hike. Further, idle global capacity in a range of sectors will allow competitive imports to reduce the momentum in domestic prices.
  
• Consequent to the strengthening of domestic growth drivers, demand-side pressures are building up.
  

M3 and non-food credit growth projections for the year have been retained at 17 per cent and 20 per cent respectively.

The macroeconomic and monetary projections are subject to a number of upside and downside risks. The main risk emanates from the global scenario, given India's trade linkages with the advanced economies and a potential slowdown in capital inflows. On the inflation front, the prospects of softening of domestic inflation around mid-2010-11 are contingent on moderating food prices, though with respect to controlling inflation, slower global growth will help lower energy and commodity prices.

Monetary stance
The policy stance for the year has been conditioned by three major considerations. Firstly, domestic economic recovery is firmly in place and is strengthening; secondly, inflationary pressures have exacerbated and become generalised; and thirdly, despite the increase in the policy rates by 75 basis points cumulatively, real policy rates are not consistent with the strong growth that the economy is now witnessing. It is, therefore, necessary to ensure normalisation of policy instruments to a level consistent with the evolving growth and inflation scenario, while taking care not to disrupt the recovery.

Recent developments
Money supply (M3) growth on a year-on-year basis moderated from 16.8 per cent at end-March 2010 to 15.3 per cent as on July 2, 2010, due to a slowdown in the growth in bank deposits. Year-onyear non-food credit growth accelerated from 17.1 per cent to 22.3 per cent by July 2, 2010, over this period. This reflects the combined impact of a pick-up in industrial activity and financing of the 3G and broadband wireless access (BWA) spectrum auctions.

In order to finance higher credit growth in the face of declining deposit growth, banks unwound their investments in mutual funds and accessed the repo window of the Reserve Bank. The Base Rates set by major banks are in the range of 7.25-8.0 per cent. While information on effective lending rates to major categories of borrowers is not yet available, it is expected that the Base Rate system will make credit pricing more efficient.

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