1. Highlights
Second Quarter
Review of
Monetary Policy
2011-12
29 October 2011 H Y Review 2011-12

2. Evolution
Busy Season & Slack Season
Credit Policies
Annual Policy and Mid-Term Review
Quarterly Reviews : Q1 & Q3
Mid-Quarter Review
29 October 2011 H Y Review 2011-12

3. Outline
Part A
1.State of the Economy
2.Outlook and Projections
3.The Policy Stance
4.Monetary Measures
29 October 2011 H Y Review 2011-12

4. Part B
Developmental & Regulatory Policies
1. Interest Rate Policy
2. Financial Markets
3. Financial Stability
4. Credit Delivery and Financial Inclusion
5. Regulatory & Supervisory Measures for Banks
6. Institutional Developments
29 October 2011 H Y Review 2011-12

5. State of the Global Economy
Economic Activity in Advanced Economies
weakening: Growth @1.5% & 1.3% in Q2 & Q3
Increasing concerns over sovereign debt
sustainability in euro area countries
Weak sovereign balance sheets and lack of
political will to find a solution
Large exposures of banks to sovereign debt
29 October 2011 H Y Review 2011-12

6. State of the Global Economy
High prices of crude oil and other commodities
High unemployment; consumer confidence
and private consumption impaired
Inflation above comfort zones in both
advanced economies and EMEs
Fiscal tightening hampering the
growth momentum in AEs and EMEs
29 October 2011 H Y Review 2011-12

7. Domestic Economy
Growth is decelerating: 7.7% in Q 1
Good Monsoon; record agricultural
production expected
All-round slowdown in industrial growth
The growth in service sector was holding up
29 October 2011 H Y Review 2011-12

8. Domestic Economy
WPI inflation has remained stubbornly
high averaging 9.6% in the current year
Inflation driven by all three major groups:
primary articles, fuel & power and
manufactured products
CPI still in the range of 9.3%
De-seasonalized sequential quarterly WPI
suggest moderation of inflation momentum!
29 October 2011 H Y Review 2011-12

9. Domestic Economy
M3 growth of 16.2% (17.2) and credit
growth of 19.3% (22.6%) were slightly
higher than indicative projections
Liquidity remained in deficit:
But within the comfort zone of RBI
Govt deficit indicators deteriorating
Fiscal deficit touched 66% of target by August
29 October 2011 H Y Review 2011-12

10. Domestic Economy
Deceleration in tax revenues and increase
in expenditure mainly towards subsidies
Increase in budgeted borrowing
by Rs 53000 crore
10 year benchmark coupon at 8.8%
Equity and forex markets came under
pressure: Reflected in equity prices,
exchange rate & CAD
29 October 2011 H Y Review 2011-12

11. Outlook and Projections
Global
Advanced economies are vulnerable
with the possibility of a prolonged slowdown
Consequent weakening of growth
prospects in EMEs
World GDP Growth: IMF Projections at
4% for 2011 and 2012
Inflation projected at 2.6% in advanced
economies and at 7.5% in EMEs
29 October 2011 H Y Review 2011-12

12. Outlook and Projections
Domestic
GDP growth projections for 2011-12
revised downwards to 7.6% from 8%
Inflation path depends on:
Behavior of crude prices
Movement of exchange rate
Supply response to food inflation
and protein items
Extent of pass-through of
global commodity prices
29 October 2011 H Y Review 2011-12

13. Outlook and Projections
Domestic
Inflation to ease from Dec 2011 and
projected at 7% by March 2012
Monetary policy to condition and contain
perception of inflation at 4% - 4.5%
M3 and non-food credit growth for 2011-12
projected at 15.5% and 18%
29 October 2011 H Y Review 2011-12

14. Outlook and Projections
Risks to projections of Growth and Inflation
Global macroeconomic
environment to impact
domestic growth through Weak
Shortage of protein- trade & finance channels growth may
rich items and soften crude
pulses can keep the prices
food inflation high
Increased market Impact of
borrowing by Govt Monetary Policy
can be diluted by
can crowd out
productive private fiscal
investment expansion
29 October 2011 H Y Review 2011-12

15. Policy Stance
The Story so far:
Exit from the crisis
CRR has been Policy rate raised
driven
raised by 100 basis 12 times by 350
expansionary
points basis points
policy in Oct 2009
Persistent anti- Helped to contain
Effective
inflationary stance inflation and
tightening by 500
for the last two anchoring inflation
basis points
years expectations
29 October 2011 H Y Review 2011-12

16. Policy Stance
Any Change in Policy Stance
can be premature
Growth concerns can be addressed
after inflation begins to decline
29 October 2011 H Y Review 2011-12

17. Monetary Measures
Policy Repo rate raised by 25 bp to 8.5%
Reverse Repo auto adjusts to 7.5% and
Marginal Standing Facility to 9.5%
“Notwithstanding current rates of inflation
persisting, the likelihood of rate action
in December Review is relatively low”
Inflation risks arise from structural imbalances
in agriculture, infrastructure bottlenecks,
distorted administered prices and the
pace of fiscal consolidation
29 October 2011 H Y Review 2011-12

18. 29 October 2011 H Y Review 2011-12

19. I. Interest Rate Policy
Deregulation of Savings Bank
Deposit Rate
 Each bank will have to offer a uniform interest
rate on savings bank deposits up to Rs.1 lakh
 For savings bank deposits over Rs.1 lakh, a bank
may provide differential rates of interest
29 October 2011 H Y Review 2011-12

20. II. Financial Markets
The
Steps taken
Guidelines Guidelines
To extend to broaden
for exchange on Credit
DvP III and deepen
traded 5- Default
facility to the market
year and 2- Swaps for
transactions for Govt
year Interest corporate
by the Gilt securities
Rate Futures bonds to
Account and interest
to be issued come into
Holders rate
in Dec 2011 effect in Nov
derivatives
2011
29 October 2011 H Y Review 2011-12

21. III. Financial Stability
Financial Stability and Developmental
Council (FSDC) and its Sub- committee
Chaired by Governor, RBI
Two Technical Groups set up: one on
Financial Inclusion & Financial Literacy and
an Inter-Regulatory Technical Group
The Financial Stability Report for June 2011
included contributions from SEBI and IRDA
The banking sector is resilient, strong
and stable as per the latest FSR
29 October 2011 H Y Review 2011-12

22. IV. Credit Delivery & Financial Inclusion
Relaxation in Branch Authorization: No prior approval
needed to open branches in tier II centers
Committee set up to suggest revised Guidelines
with regard to Priority Sector lending
Credit flow to MSE sector to be closely
monitored by RBI Quarterly instead of Half-yearly
Licensing of state and central co-operative
banks and revival of short term Rural
Co-operative credit structure is on
29 October 2011 H Y Review 2011-12

23. IV. Credit Delivery & Financial Inclusion
Every village with a population of over 2000 to
be provided with banking services by 2012
(by branch, BC, ATM, mobile van, etc)
Progress made by banks in implementation of
Financial Inclusion Plans is monitored through
monthly and quarterly reports
Decided to implement the Recommendations
of the Committee on Customer Service
29 October 2011 H Y Review 2011-12

24. 29 October 2011 H Y Review 2011-12

25. Measures for Commercial Banks
Draft Guidelines for implementing the Basel III
framework to be issued by December 2011.
Phase-in period begins in Jan 2013
Guidelines for implementation of advanced
approaches under Basel II framework
for market, credit and operational
risks are issued / being issued
BCBS to introduce countercyclical and
provisioning buffers. PCR an interim measure;
more realistic framework being prepared
29 October 2011 H Y Review 2011-12

26. Measures for Commercial Banks
To bring about transparency in pricing: risk to be priced
adequately and interest charged in fair and
non-discriminatory manner; Working Group set up
The prudential guidelines on „Restructuring of
advances‟ to be reviewed for suitable revision
Banks to rigorously evaluate risks arising out of
unhedged foreign currency exposures of their
corporates and price them in the credit risk premium
Introduction of holding company structure
for banks and FIs is under consideration
29 October 2011 H Y Review 2011-12

27. Measures for Commercial Banks
Licensing of new banks in the Private Sector:
Final Guidelines will be issued after the
amendments to the B R Act are approved
by Govt of India
Guidelines on the mode of presence of
foreign banks in India are being finalized
Guidelines on compensation practices are
being finalized in line with principles
recommended by FSB and BCBS Guidelines
29 October 2011 H Y Review 2011-12

28. VI. Institutional Developments
A new category of NBFCs called NBFC-MFIs
to be introduced: the regulatory framework
will be broadly based on the recommendations
of the Malegam Committee
The existing regulatory framework for
NBFCs is being comprehensively reviewed
Introduction of chip-based and PIN-based
cards and additional security safeguards at PoS
to be implemented by card issuers & banks
29 October 2011 H Y Review 2011-12

29. VI. Institutional Developments
NEFT: acceptability, reach and volumes are phenomenal;
Next Generation RTGS is underway
Automated data flow (a straight through process)
from the CBS of banks to the RBI being ushered in
To ensure that all cases of detection of forged notes
in banks are promptly reported to RBI & Police, filing
of FIR is done away with for detection up to four
pieces in a single transaction save monthly reporting
29 October 2011 H Y Review 2011-12

30. frjoseph@rbi.org.in
29 October 2011 H Y Review 2011-12