Highlights of RBI's FY11 Annual Policy Statement

MUMBAI - Following are the highlights of the Reserve Bank of India's Annual Policy Statement for 2010-11 (Apr-Mar):

MAIN 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

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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

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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,

Dewang K. Mehta

DENIP Consultants - www.denip.in