What is RBI's Monetary Policy?

The Reserve Bank of India will announce its Monetary and Credit Policy for the first half of
the financial year 2002-03 on April 29. Even as RBI Governor Bimal Jalan puts the finishing
touches to the document, have you ever considered what is the significance of the biannual
exercise?

In a world of policies in the financial sector, nothing could get as alien as the Monetary
Policy. Terms like M3, CRR, SLR, PLR and OMO would make you think that the typical IT-
bug has caught the financial sector. But take a closer look as the Monetary and Credit Policy
is crucial to all of us and more so to the banking sector.

For the uninitiated, this policy determines the supply of money in the economy and the rate
of interest charged by banks. The policy also contains an economic overview and presents
future forecasts.

What is the Monetary Policy?

The Monetary and Credit Policy is the policy statement, traditionally announced twice a
year, through which the Reserve Bank of India seeks to ensure price stability for the
economy.

These factors include - money supply, interest rates and the inflation. In banking and
economic terms money supply is referred to as M3 - which indicates the level (stock) of
legal currency in the economy.

Besides, the RBI also announces norms for the banking and financial sector and the
institutions which are governed by it. These would be banks, financial institutions, non-
banking financial institutions, Nidhis and primary dealers (money markets) and dealers in
the foreign exchange (forex) market.

When is the Monetary Policy announced?

Historically, the Monetary Policy is announced twice a year - a slack season policy (April-
September) and a busy season policy (October-March) in accordance with agricultural
cycles. These cycles also coincide with the halves of the financial year.

Initially, the Reserve Bank of India announced all its monetary measures twice a year in the
Monetary and Credit Policy. The Monetary Policy has become dynamic in nature as RBI
reserves its right to alter it from time to time, depending on the state of the economy.

However, with the share of credit to agriculture coming down and credit towards the
industry being granted whole year around, the RBI since 1998-99 has moved in for just one
policy in April-end. However a review of the policy does take place later in the year.

How is the Monetary Policy different from the Fiscal Policy?

Two important tools of macroeconomic policy are Monetary Policy and Fiscal Policy.

The Monetary Policy regulates the supply of money and the cost and availability of credit in
the economy. It deals with both the lending and borrowing rates of interest for commercial
banks.

The Monetary Policy aims to maintain price stability, full employment and economic
growth.

The Reserve Bank of India is responsible for formulating and implementing Monetary
Policy. It can increase or decrease the supply of currency as well as interest rate, carry out
open market operations, control credit and vary the reserve requirements.

The Monetary Policy is different from Fiscal Policy as the former brings about a change in
the economy by changing money supply and interest rate, whereas fiscal policy is a broader
tool with the government.

The Fiscal Policy can be used to overcome recession and control inflation. It may be defined
as a deliberate change in government revenue and expenditure to influence the level of
national output and prices.

For instance, at the time of recession the government can increase expenditures or cut
taxes in order to generate demand.

On the other hand, the government can reduce its expenditures or raise taxes during
inflationary times. Fiscal policy aims at changing aggregate demand by suitable changes in
government spending and taxes.

The annual Union Budget showcases the government's Fiscal Policy.

What are the objectives of the Monetary Policy?

The objectives are to maintain price stability and ensure adequate flow of credit to the
productive sectors of the economy.

Stability for the national currency (after looking at prevailing economic conditions), growth
in employment and income are also looked into. The monetary policy affects the real sector
through long and variable periods while the financial markets are also impacted through
short-term implications.

There are four main 'channels' which the RBI looks at:

 Quantum channel: money supply and credit (affects real output and price level
through changes in reserves money, money supply and credit aggregates).
 Interest rate channel.
 Exchange rate channel (linked to the currency).
  Asset price.

All this is more linked to the banking sector. How does the Monetary Policy impact the
individual?

In recent years, the policy had gained in importance due to announcements in the interest
rates.

Earlier, depending on the rates announced by the RBI, the interest costs of banks would
immediately either increase or decrease.

A reduction in interest rates would force banks to lower their lending rates and borrowing
rates. So if you want to place a deposit with a bank or take a loan, it would offer it at a lower
rate of interest.

On the other hand, if there were to be an increase in interest rates, banks would
immediately increase their lending and borrowing rates. Since the rates of interest affect
the borrowing costs of corporates and as a result, their bottomlines (profits), the monetary
policy is very important to them also.

But over the past 2-3 years, RBI Governor Bimal Jalan has preferred not to
wait for the Monetary Policy to announce a revision in interest rates and
these revisions have been when the situation arises.

Since the financial sector reforms commenced, the RBI has moved towards a
market-determined interest rate scenario. This means that banks are free to
decide on interest rates on term deposits and loans.

Being the central bank, however, the RBI would have a say and determine direction on
interest rates as it is an important tool to control inflation.

The bank rate is a tool used by RBI for this purpose as it refinances banks at the this rate. In
other words, the bank rate is the rate at which banks borrow from the RBI.

How was the scenario prior to recent liberalisation?

Prior to recent liberalisation, the RBI resorted to direct instruments like interest rates
regulation, selective credit control and CRR (cash reserve ratio) as monetary instruments.

One of the risks emerging in the past 5-7 years (through the capital flows and liberalisation
of the financial sector) is that potential risk has increased for institutions. Thus, financial
stability has become crucial and there are concerns relating to credit flows to the
agricultural sector and small-scale industries.

What do the terms CRR and SLR mean?

CRR, or cash reserve ratio, refers to a portion of deposits (as cash) which banks have to
keep/maintain with the RBI. This serves two purposes. It ensures that a portion of bank
deposits is totally risk-free and secondly it enables that RBI control liquidity in the system,
and thereby, inflation.

Besides the CRR, banks are required to invest a portion of their deposits in government
securities as a part of their statutory liquidity ratio (SLR) requirements.

The government securities (also known as gilt-edged securities or gilts) are bonds issued
by the Central government to meet its revenue requirements. Although the bonds are long-
term in nature, they are liquid as they can be traded in the secondary market.

Since 1991, as the economy has recovered and sector reforms increased, the CRR has fallen
from 15 per cent in March 1991 to 5.5 per cent in December 2001. The SLR has fallen from
38.5 per cent to 25 per cent over the past decade.

What impact does a cut in CRR have on interest rates?

From time to time, RBI prescribes a CRR or the minimum amount of cash that banks have
to maintain with it. The CRR is fixed as a percentage of total deposits. As more money
chases the same number of borrowers, interest rates come down.

Does a change in SLR and gilts products impact interest rates?

SLR reduction is not so relevant in the present context for two reasons:

First, as part of the reforms process, the government has begun borrowing at market-
related rates. Therefore, banks get better interest rates compared to earlier for their
statutory investments in government securities.

Second, banks are still the main source of funds for the government.

This means that despite a lower SLR requirement, banks' investment in government
securities will go up as government borrowing rises. As a result, bank investment in gilts
continues to be high despite the RBI bringing down the minimum SLR to 25 per cent a
couple of years ago.

Therefore, for the purpose of determining the interest rates, it is not the SLR requirement
that is important but the size of the government's borrowing programme. As government
borrowing increases, interest rates, too, rise.

Besides, gilts also provide another tool for the RBI to manage interest rates. The RBI
conducts open market operations (OMO) by offering to buy or sell gilts.

If it feels interest rates are too high, it may bring them down by offering to buy securities at
a lower yield than what is available in the market.
How does the Monetary Policy affect the domestic industry and exporters in particular?

Exporters look forward to the monetary policy since the central bank always makes an
announcement on export refinance, or the rate at which the RBI will lend to banks which
have advanced pre-shipment credit to exporters.

A lowering of these rates would mean lower borrowing costs for the exporter.

The stock markets and money move similarly, in some ways. Why?

Most people attribute the link between the amount of money in the economy and
movements in stock markets to the amount of liquidity in the system. This is not entirely
true.

The factor connecting money and stocks is interest rates. People save to get returns on
their savings. In true market conditions, this made bank deposits or bonds (whose returns
are linked to interest rates) and stocks (whose returns are linked to capital gains),
competitors for people's savings.

A hike in interest rates would tend to suck money out of shares into bonds or deposits; a
fall would have the opposite effect. This argument has survived econometric tests and
practical experience.

Is the money supply related to jobs, wages and output?

At any point of time, the price level in the economy is determined by the amount of money
floating around. An increase in the money supply - currency with the public, demand
deposits and time deposits - increases prices all round because there is more currency
moving towards the same goods and services.

Typically, the RBI follows a least-inflation policy, which means that its money market
operations as well as changes in the bank rate are generally designed to minimise the
inflationary impact of money supply changes. Since most people can generally see through
this strategy, it limits the impact of the RBI's monetary moves to affect jobs or production.

The markets, however, move to the RBI's tune because of the link between interest rates
and capital market yields. The RBI's policies have maximum impact on volatile foreign
exchange and stock markets.

Jobs, wages and output are affected over the long run, if the trends of high inflation or low
liquidity persist for very long period.

If wages move slower than other prices, higher inflation will drive real wages lower and
encourage employers to hire more people. This in turn ramps up production and
employment.
This was the theoretical justification of a long-term trend that showed that higher inflation
and employment went together; when inflation fell, unemployment increased.

What are the measures to regulate money supply?

The RBI uses the interest rate, OMO, changes in banks' CRR and
primary placements of government debt to control the money supply.
OMO, primary placements and changes in the CRR are the most
popular instruments used.

Under the OMO, the RBI buys or sells government bonds in the
secondary market. By absorbing bonds, it drives up bond yields and
injects money into the market. When it sells bonds, it does so to suck money out of the
system.

The changes in CRR affect the amount of free cash that banks can use to lend - reducing the
amount of money for lending cuts into overall liquidity, driving interest rates up, lowering
inflation and sucking money out of markets.

Primary deals in government bonds are a method to intervene directly in markets, followed
by the RBI. By directly buying new bonds from the government at lower than market rates,
the RBI tries to limit the rise in interest rates that higher government borrowings would
lead to.

Considering that interest rates are now tweaked looking at market conditions, is the
Monetary Policy losing its importance?

Bimal Jalan has said he would make the Credit Policy a 'non-event' and would use the
policy only to review developments in the banking industry and money markets. Interest
rate announcements since 1998-99 were based on economic and market developments.

The policy now concentrates mostly on structural issues in the banking industry.

Some Monetary Policy terms:

Bank Rate

Bank rate is the minimum rate at which the central bank provides loans to the commercial
banks. It is also called the discount rate.

Usually, an increase in bank rate results in commercial banks increasing their lending rates.
Changes in bank rate affect credit creation by banks through altering the cost of credit.

Cash Reserve Ratio

All commercial banks are required to keep a certain amount of its deposits in cash with
RBI. This percentage is called the cash reserve ratio. The current CRR requirement is 8 per
cent.

Inflation

Inflation refers to a persistent rise in prices. Simply put, it is a situation of too much money
and too few goods. Thus, due to scarcity of goods and the presence of many buyers, the
prices are pushed up.

The converse of inflation, that is, deflation, is the persistent falling of prices. RBI can reduce
the supply of money or increase interest rates to reduce inflation.

Money Supply (M3)

This refers to the total volume of money circulating in the economy, and conventionally
comprises currency with the public and demand deposits (current account + savings
account) with the public.

The RBI has adopted four concepts of measuring money supply. The first one is M1, which
equals the sum of currency with the public, demand deposits with the public and other
deposits with the public. Simply put M1 includes all coins and notes in circulation, and
personal current accounts.

The second, M2, is a measure of money, supply, including M1, plus personal deposit
accounts - plus government deposits and deposits in currencies other than rupee.

The third concept M3 or the broad money concept, as it is also known, is quite popular. M3
includes net time deposits (fixed deposits), savings deposits with post office saving banks
and all the components of M1.

Statutory Liquidity Ratio

Banks in India are required to maintain 25 per cent of their demand and time liabilities in
government securities and certain approved securities.

These are collectively known as SLR securities. The buying and selling of these securities
laid the foundations of the 1992 Harshad Mehta scam.

Repo

A repurchase agreement or ready forward deal is a secured short-term (usually 15 days)

loan by one bank to another against government securities.
Legally, the borrower sells the securities to the lending bank for cash, with the stipulation
that at the end of the borrowing term, it will buy back the securities at a slightly higher
price, the difference in price representing the interest.

Open Market Operations

An important instrument of credit control, the Reserve Bank of India purchases and sells
securities in open market operations.

In times of inflation, RBI sells securities to mop up the excess money in the market.
Similarly, to increase the supply of money, RBI purchases securities.

Y.Venugopal Reddy, Governor, Reserve Bank of India [ Get Quote ] presented the Third
Quarter Review of Annual Statement on Monetary Policy for the Year 2007-08 on Tuesday. 

 Bank rate, reverse repo rate, repo rate and cash reserve ratio (CRR) kept unchanged.
 The flexibility to conduct overnight or longer term repo including the right to accept
or reject tenders under the liquidity adjustment facility (LAF), wholly or partially, is
retained.
 Overall real GDP growth projection for 2007-08 at around 8.5 per cent is retained.
 The policy endeavour would be to contain inflation close to 5.0 per cent in 2007-08
while conditioning expectations in the range of 4.0-4.5 per cent.
 While non-food credit has decelerated, growth in money supply and aggregate
deposits of scheduled commercial banks continue to expand well above indicative
projections.
 High growth in reserve money is driven by large accretion to RBI's net foreign
exchange assets.
 Liquidity management will assume priority in the conduct of monetary policy
through appropriate and timely action.
 Barring the emergence of any adverse and unexpected developments in various
sectors of the economy and keeping in view the current assessment of the economy
including the outlook for growth and inflation, the overall stance of monetary
policy in the period ahead will broadly continue to be:
To reinforce the emphasis on price stability and well-anchored inflation expectations while
ensuring a monetary and interest rate environment conducive to continuation of the
growth momentum and orderly conditions in financial markets.

 RBI Credit Policy: Complete coverage

To emphasize credit quality as well as credit delivery, in particular, for employment-

intensive sectors, while pursuing financial inclusion.

To monitor the evolving heightened global uncertainties and domestic situation impinging
on inflation expectations, financial stability and growth momentum in order to respond
swiftly with both conventional and unconventional measures, as appropriate.

Details

Dr. Y.Venugopal Reddy, Governor today presented the Third Quarter Review of Annual
Statement on Monetary Policy for the year 2007-08. The Review consists of three sections:
I. Assessment of Macroeconomic and Monetary Developments; II. Stance of Monetary
Policy; and III. Monetary Measures.

Domestic developments

 Real GDP growth moderated to 9.1 per cent in the first half of 2007-08 from 9.9 per
in the first half of 2006-07.
 Inflation, based on variations in the wholesale price index (WPI) on a year-on-year
basis, eased to 3.8 per cent as on January 12, 2008 from its peak of 6.4 per cent at
the beginning of the financial year and from 6.2 per cent a year ago.
 Prices of primary articles registered a year-on-year increase of 3.9 per cent as on
January 12, 2008 as compared with 9.5 per cent a year ago.
 Manufacturing inflation eased to 3.9 per cent as on January 12, 2008 from 5.8 per
cent a year ago.
 The price of the Indian basket of international crude has registered a sustained
increase during 2007-08 from US $ 66.4 in April-June, US $ 72.7 in July-September,
US $ 85.7 in October-December 2007 to US $ 88.9 per barrel as on January 25,
2008.
 inflation based on the consumer price index (CPI) for industrial workers (IW)
declined to 5.5 per cent on a year-on-year basis in November 2007 from 6.3 per
cent a year ago.
 The CPI for urban non-manual employees (UNME), agricultural labourers (AL) and
rural labourers (RL) also declined to 5.1 per cent, 5.9 per cent and 5.6 per cent,
respectively, in December 2007 as compared with 6.9 per cent, 8.9 per cent and 8.3
per cent a year ago.
 As on January 4, 2008 money supply (M3) increased by 22.4 per cent on a year-on-
year basis which was higher than 20.8 per cent a year ago and well above the
 projected trajectory of 17.0-17.5 per cent indicated in the Annual Policy Statement
for 2007-08.
 Reserve money increased by 30.6 per cent on a year-on-year basis as on January 18,
2008 as compared with 20.0 per cent a year ago.
 In the current financial year, the growth in aggregate deposits of scheduled
commercial banks (SCBs), on a year-on-year basis, at Rs.6,00,761 crore (25.2 per
cent) was higher than that of Rs.4,44,241 crore (22.9 per cent) a year ago.
 On a year-on-year basis, non-food credit of SCBs expanded by Rs.3,82,155 crore
(22.2 per cent) as on January 4, 2008 on top of the increase of Rs.4,16,418 crore
(31.9 per cent) a year ago.
 The year-on-year growth in total resource flow from SCBs to the commercial sector
decelerated to 21.7 per cent from 30.1 per cent a year ago.
 Banks' holdings of Government and other approved securities at 29.1 per cent of
their net demand and time liabilities (NDTL) as on January 4, 2008 was marginally
higher than 28.6 per cent a year ago.
 The overhang of liquidity as reflected in the sum of LAF, MSS and the Central
Government's cash balances increased from Rs.85,770 crore at end-March 2007 to
Rs.2,58,187 crore on January 17, 2008 before declining to Rs.2,32,809 crore on
January 24, 2008.
 During the third quarter of 2007-08, money, debt and foreign exchange markets
remained generally stable, despite large movements in liquidity conditions.
 Rapid growth in turnover in the foreign exchange market was sustained by large
surplus conditions in the spot market as average daily turnover increased to US $
50.1 billion for the quarter ended December 2007 from US $ 27.6 billion in the
corresponding quarter of the previous year.
 During March 2007-January 2008, pubic sector banks (PSBs) that were earlier
paying higher interest rates on longer term deposits, readjusted their interest rates
downwards by 25-50 basis points, while those offering lower deposit rates for
similar maturity earlier increased their deposit rates by 50-75 basis points.
 During March 2007-January 2008, the benchmark prime lending rates (BPLRs) of
PSBs increased by 25-75 basis points from a range of 12.25-12.75 per cent to
12.50-13.50 per cent.
 The BSE Sensex increased from 13,072 at end-March 2007 to 18,362 on January 25,
2008 registering an increase of 40.5 per cent over end-March 2007.
 The gross market borrowings of the Central Government through dated securities at
Rs.1,47,000 crore (Rs.1,30,000 crore a year ago) during 2007-08 so far (up to
January 25, 2008) constituted 94.6 per cent of the budget estimates (BE) while net
market borrowings at Rs.1,03,092 crore (Rs.91,432 crore a year ago) constituted
94.1 per cent of the BE.

External Developments

 During April-November 2007, merchandise exports rose by 21.9 per cent in US

dollar terms as compared with 26.2 per cent in the corresponding period of the
previous year. Import growth was also lower at 26.9 per cent as compared with
 27.4 per cent in the previous year. The merchandise trade deficit widened to US $
52.8 billion from US $ 38.5 billion in the previous year.
 While oil imports recorded a lower growth of 9.8 per cent as compared with 42.0
per cent a year ago, non-oil imports increased by 35.3 per cent as compared with
21.3 per cent a year ago.
 Foreign exchange reserves increased by US $ 85.7 billion during the current
financial year so far and stood at US $ 284.9 billion on January 18, 2008.
 Over the end-March 2007 level, the rupee appreciated by 9.61 per cent against the
US dollar, by 8.85 per cent against the pound sterling and by 0.95 per cent against
the Japanese yen, but remained unchanged against the euro as on January 25, 2008.

Global Developments

 According to the World Economic Outlook (WEO) of the International Monetary

Fund (IMF) released in October 2007, the forecast for global real GDP growth on a
purchasing power parity basis is placed at 5.2 per cent for 2007 as compared with
5.4 per cent in 2006 and is expected to decelerate further to 4.8 per cent in 2008.
 In the US, real GDP growth is expected to slow down from the fourth quarter of
2007 onwards as the deepening housing market correction and ongoing financial
market turmoil are expected to curb growth more severely, although exports could
play a mitigating role.
 Globally, inflationary pressures have re-emerged as a key risk to global growth.
Inflation pressures have raised concerns in the US, UK, the euro area and in some of
the emerging market economies (EMEs) such as China, Malaysia, Indonesia and
Chile.
 The persistence of high food prices, oil prices sustained at elevated levels and
continued high prices of other commodities pose significant inflation risks for the
global economy and challenges for monetary policy worldwide.
 The turbulence in the international financial markets since July 2007, triggered by
defaults in the US subprime mortgage market, deepened in subsequent months.
These unusual developments indicated heightened uncertainties and emerging
challenges for the conduct of monetary policy, especially for EMEs.
 With the beginning of the turbulence, central banks of advanced economies
undertook an increasingly expansive monetary policy course by cutting policy rates
(US Federal Reserve) and also supplying financial markets with additional liquidity.
 Some central banks such as the US Federal Reserve, Bank of England and the Bank of
Canada have cut policy rates during the third and fourth quarters of 2007 after
financial markets were significantly affected by turbulence.
 Central banks of several countries, including the euro area, New Zealand , Japan ,
Korea, Malaysia, Thailand and Brazil have not changed their rates in the last
quarter of 2007.
 The central banks that have tightened their policy rates in recent months include
the Reserve Bank of Australia , the People's Bank of China, the Banco Central de
Chile and Banco de Mexico.
  Several central banks confronted with volatile and large capital flows have
employed a variety of measures to manage and stabilise these flows with a view to
reducing overheating, currency appreciation and the economy's vulnerability to
sharp reversals of flows.
 A common feature among the policies adopted by most of them is monetary
tightening involving either hikes in policy rates or hikes in reserve requirements or
both.
 Measures directly aimed at managing capital flows are also in evidence in many
EMEs.

Overall Assessment

 Real GDP originating in agriculture and allied activities has accelerated in the first
half of 2007-08 in comparison with April-September 2006 and subsequent
developments seem to confirm the positive outlook for agriculture.
 Assuming that there are no exogenous shocks, either global or domestic, the
prospects for the industrial sector over the rest of 2007-08 remain reasonably
positive at this juncture.
 While the prospects for services continue to be favourable at this juncture,
uncertainties surrounding the evolution of global developments could affect the
outlook.
 Domestic activity continues to be investment driven, supported by external demand.
Building up of supply capacities, both new and existing, is strongly underway as
reflected in the sustained demand for domestic and imported capital goods.
 Key indicators point to the persistence of aggregate demand pressures, including
into the near-term.
 Indications are getting stronger of upside inflationary risks in the period ahead.
 Domestic monetary and liquidity conditions continue to be more expansionary than
before and are likely to be amplified by global factors.
 There was a large increase in the total overhang of liquidity over the third quarter of
2007-08, reflecting the sizeable expansion in primary liquidity generated by the
large accretions to the Reserve Bank's net foreign assets.
 In the foreign exchange market, large inflows have imposed persistent upward
pressures on the exchange rate of the rupee which have become accentuated in the
wake of cuts in the US Federal Funds target rate.
 There has been some improvement in the finances of the Central Government as the
gross fiscal deficit has declined indicating that adherence to the Fiscal
Responsibility and Budget Management (FRBM) rules in the current financial year
is on track.
 Consensus forecasts indicate a slowing of the global economy in 2007 and 2008
with the US subprime crisis, food and crude prices posing the gravest risks. While
the dangers of global recession are relatively subdued at the current juncture and
consensus expectations seem to support a soft landing, the upside pressures on
inflation have become more potent and real than before.
  Headline inflation has trended up in the US, the euro area, Japan and China. Overall,
inflationary pressures have firmed up with implications for the outlook for 2008.
 Developments in global financial markets present several issues that need to be
monitored carefully in the context of the implications for EMEs. First, corporate
credit spreads and those on mortgage-backed securities have widened since early
October as concerns relating to the possibility of prolonged disruption to credit
intermediation have deepened. Second, the impact of the recent financial market
turmoil has been sizeable on banks, particularly internationally active banks on
both sides of the Atlantic. Third, the responses of central banks to recent events
have demonstrated that ensuring financial stability can, under certain
circumstances, assume overriding importance relative to other more explicitly
pursued goals.
 In view of the evolving global macroeconomic prospects in the near-to-medium
term, EMEs face several challenges. First, they face risks from tightening of credit
standards in advanced economies. Second, dependence on imports and higher
energy intensity of output may make EMEs more exposed to inflation shocks. Third,
in the wake of some macroeconomic and political developments, international
financial markets respond differently to the EMEs. Fourth, the self-correcting
mechanisms in financial markets happen to operate far less efficiently in the EMEs.
Fifth, real sector flexibilities may be far less in EMEs. Finally, the distinction
between flexibility and volatility in the context of financial markets in EMEs has to
be based on the preparedness of the markets and the market participants.

Stance of Monetary Policy

 The projection of overall real GDP growth in 2007-08 is maintained at around 8.5
per cent for policy purposes, assuming no further escalation in international crude
prices and barring domestic or external shocks.
 The policy endeavour would be to contain inflation close to 5.0 per cent in 2007-08
while conditioning expectations in the range of 4.0-4.5 per cent so that an inflation
rate of around 3.0 per cent becomes a medium-term objective.
 The rate of money supply has picked up coincident with a jump in the growth of
reserve money, driven by the accretion to the Reserve Bank's foreign exchange
assets. Moderating money supply in alignment with the indicative projections of
17.0-17.5 per cent set out in the Annual Policy Statement of April 2007 may
warrant appropriate responses, given the considerations for ensuring
macroeconomic and financial stability going forward.
 In view of the risks associated with international financial developments impacting
balance sheets of corporates with sizeable external liabilities, banks are urged to
review large foreign currency exposures and to put in place a system for
monitoring such unhedged exposures on a regular basis so as to minimise risks of
instability in the financial system under the current highly uncertain conditions.
Banks are also urged to carefully monitor corporate activity in terms of
treasury/trading activity and sources of other income to the extent that embedded
credit/market risks pose potential impairment to the quality of banks' assets.
  In the context of a more open capital account and the size of inflows currently,
public policy preference for a hierarchy of capital flows with a priority for more
stable components could necessitate a more holistic approach, combining sectoral
regulations with broader measures to enhance the quality of flows and make the
source of flows transparent. In this context, it is critical for public policy to
effectively, demonstrably and convincingly indicate commitment to managing
capital flows consistent with macro fundamentals through appropriate and decisive
policy actions.
 The setting of monetary policy in India has been rendered complex. On the one
hand, the underlying fundamentals of the economy remain strong and resilient and
the outlook continues to be positive. At the same time, while there is no visible or
immediate threat to financial stability in India from global developments, the need
for continued but heightened vigilance has increased with an emphasis on
readiness to take timely, prompt and appropriate measures to mitigate the risks to
the extent possible.
 A disaggregated analysis of supply and demand factors across select sectors would
enable appropriate public policy responses keeping in view the employment
intensity of some of these sectors. Monetary policy, per se, can essentially address
issues relating to aggregate demand but the associated policies in the financial
sector could, to the extent possible, take account of the evolving circumstances as
reflected in the disaggregated analysis. In view of the prevailing liquidity conditions
and the sustained profitability of banks as reflected in net interest margins, there is
a need for banks to undertake institutional and procedural changes for enhancing
credit delivery to sectors that are employment-intensive.
 Over the period ahead, liquidity management will continue to assume priority in the
conduct of monetary policy and developments having implications for liquidity
management would warrant appropriate and timely action.
 The Reserve Bank will continue with its policy of active demand management of
liquidity through appropriate use of the CRR stipulations and open market
operations (OMO) including the MSS and the LAF, using all the policy instruments
at its disposal flexibly, as and when the situation warrants.
 Barring the emergence of any adverse and unexpected developments in various
sectors of the economy and keeping in view the current assessment of the economy
including the outlook for growth and inflation, the overall stance of monetary
policy in the period ahead will broadly continue to be:

To reinforce the emphasis on price stability and well-anchored inflation expectations while
ensuring a monetary and interest rate environment conducive to continuation of the
growth momentum and orderly conditions in financial markets.

To emphasise credit quality as well as credit delivery, in particular, for employment-

intensive sectors, while pursuing financial inclusion.
To monitor the evolving heightened global uncertainties and domestic situation impinging
on inflation expectations, financial stability and growth momentum in order to respond
swiftly with both conventional and unconventional measures, as appropriate.

Monetary Measures

 Bank Rate kept unchanged at 6.0 per cent.

 The reverse repo rate and the repo rate under the LAF are kept unchanged at 6.0
per cent and 7.75 per cent, respectively.
 The Reserve Bank retains the option to conduct overnight or longer term
repo/reverse repo under the LAF depending on market conditions and other
relevant factors. The Reserve Bank will continue to use this flexibility including the
right to accept or reject tender(s) under the LAF, wholly or partially, if deemed fit,
so as to make efficient use of the LAF in daily liquidity management.
 CRR kept unchanged at 7.5 per cent.

The Annual Policy Statement for the year 2008-09 will be announced on April 29, 2008.