RBI mid quarter review

• In its mid-quarter monetary policy review, the Reserve Bank of India has not made any significant monetary changes.
  
• The repo and the reverse repo rates as well as the CRR remain unchanged. Based on current growth and inflation trends,
  
• the RBI had, on November 2, in its second quarterly review, effectively ruled out policy action in the near future.
• There has been no significant change in its assessment of growth prospects for this year. In fact, considering that the economy has clocked an 8.9 per cent growth during the first six months, the central bank has been somewhat conservative in retaining its forecast at 8.5 per cent.
  
• Almost certainly, the growth projections will be marked up in the third-quarter review due towards the end of January 2011. As for inflation, despite some recent signs of moderation, there are reasons to be cautious. After remaining in double-digits for five successive months, WPI inflation declined to 8.8 per cent in August and to 7.5 per cent in November. Consumer price (CPI) inflation for industrial workers and rural/agricultural labourers has dropped to single-digit since August, after remaining in double-digits for over a year.
• Besides, the pace of decline in food inflation has been slower than expected due largely to structural factors. For instance, while the consumption of milk, eggs, meat, and other protein-related items has increased, their prices have moderated less than those of cereals and pulses.
  
• The statutory liquidity ratio has been brought down by one percentage point to 24 per cent and, together with an aggressive programme of open market purchases of government securities, this will inject liquidity to an extent of Rs.48,000 crore. The release of sizable primary liquidity to match the needs of an expanding economy is justified but it is not clear how these measures will impact on interest rates. Given the sluggish growth in their deposits, banks will have to pay more. Besides, the RBI might very soon have to signal higher interest rates to anchor inflationary expectations, which are on the rise in the wake of higher prices of transportation fuels. The global economic news continues to be mixed. Emerging economies are forging ahead, while Europe's progress is somewhat hampered by the emergence of sovereign debt problems.