Annual Monetary Policy Statement 2013-14

Contents: 1. Monetary Policy Objectives 2. State of the Economy: Global and Domestic 3. Outlook and Projections 3. Risk Factors 5. The Policy Stance 6. Monetary Measures 7. Market Reactions

Monetary Policy Objectives

Maintaining Price Stability Achieving Financial Stability Regulating the Supply of Money Regulating the Cost of Availability of credit

State of Economy : Global

Global Economic activity remains subdued slow recovery in US and Japan In the Euro area recessionary conditions still persists Revival of growth in several EDEs

Domestic Economy
GDP growth of only 4.5%in Q3 of 2012-13. Cumulative GDP growth for the period April Dec 2012 declined to 5% from 6.6% a year ago o Due to : - Protracted weakness in industrial activity aggravated by supply bottlenecks -Slow down in the services sector reflecting weak external demand

State of Economy: Domestic

WPI Inflation moderated to an average of 7.3% in 2012-13 from 8.9% in the previous year. The easing was significant in Q4 of 2012-13 with the year end inflation at n 6% This was mainly due to the decline in Non food manufactured products inflation Combined (Rural and Urban) CPI Inflation largely driven by food inflation averaged 10.2% during 2012-13

Liquidity Management
Liquidity remained under pressure throughout the year RBI Lowered the CRR of SCBs cumulatively by 75 bps on three occasions and the SLR by 10 bps during the year Additionally, RBI injected liquidity to the tune of Rs 1546 billion through Open Market Operations(OMOs)

Domestic economy- Other Developments

Continuing moderation in Corporate sales though profit margins increased slightly. Improved money supply growth at 13.3% by end March 2013 Decelerated Non Food Credit growth Higher flow of financial resources to the commercial sector from the banks. A firm commitment for fiscal consolidation by the government Exports have returned to positive growth in the fourth quarter after contracting in the first three quarters.

Outlook and Projections: Global

Growth Global growth is expected to be sluggish in 2013 The IMF has forecast the global growth to be at 3.3% in 2013 and 4% in 2014 Inflation Inflation is expected to ease from 2% in 2012 to 1.7% in 2013 in AEs and in the EDEs it is expected to be at 5.9% in 2013, same as the previous year

Outlook and Projections: Domestic

Growth Economic activity is expected to show a modest improvement over last year. Baseline GDP growth for 2013-14 is projected at 5.7% Inflation WPI inflation is expected to be range bound around 5.5% during 2013-14 Monetary Aggregates M3 growth-13% ,Deposit growth-14%, Non-food credit growth- 15%

Risk Factors:
A large CAD much above the sustainable level Investment sentiment remains subdued Tightening the supply side constraints

The Policy Stance:

The policy stance is intended to : Continue to address the accentuated risks to growth Guard against the risks of inflation pressure reemerging and adversely impacting inflation expectations, even as corrections in administered prices release suppressed inflation. Appropriately manage liquidity to ensure adequate credit flow to the productive sectors of the economy

Monetary Stance
Repo rate reduced by 25bps from 7.5% to 7.25% Reverse Repo rate stands adjusted to 6.25% Marginal Standing Facility stands adjusted to 8.25% Bank rate stands adjusted to 8.25% CRR of Scheduled Banks has been retained at 4% of their NDTLs.