The review left unchanged the key rates — repo at 4.75 per cent and the reverse repo at 3.25 per cent at their historically low levels. The Bank Rate and CRR continue to remain at 6 per cent and 5 per cent respectively. In adopting the monetary stance for the quarter, RBI does not see the need for any further injection of liquidity when domestic and external financing conditions are now “more favourable”.

The business outlook is also positive signalling revival of industrial activity though export demand would continue to remain weak due to persistence of global recession.

RBI has projected a 6 per cent GDP growth while it has raised the inflation rate to 5 per cent, keeping in view the global trend in commodity prices and domestic demand-supply balances. RBI has evidently taken into account the likely impact of the massive stimulus already provided by Government. “The overall macro-economic scene continues to be uncertain although it is expected fiscal and monetary stimulus measures will boost domestic demand in 2009-10”. In its annual policy statement in April, RBI had assumed growth at “around 6 per cent” and inflation at 4 per cent by end-March.

The review says uptrend in growth momentum is unlikely before the middle of the current fiscal year. The growth projection is placed at 6 per cent with “upward bias” .In revising its inflation estimate, RBI points out that the rate of inflation had increased by 3.5 per cent on financial year basis. The negative rates since June were due to the base effect which would be waning by October, it said.

On interest rates, RBI said credit conditions have eased though credit demand was subdued in the first quarter. With ample liquidity, competitive pressures on lending rates increased. Consequently, transmission of policy rate changes to bank lending rates has improved since the annual policy statement in April. As short-term deposits contracted earlier at high rates mature, there would be room for banks to further reduce lending rates.

RBI said Government's massive borrowing programme would go through “smoothly”. By July 27, 63 per cent of net borrowings for the first half (Rs.265,911 crores) had been completed. There is sufficient head-room available to RBI to manage the balance of borrowings smoothly. Keeping in view the needs of the economy, RBI projects money supply expansion at 18 per cent, higher than the 17 per cent in its April Policy statement while deposit and non-food credit growth rates are placed at 19 and 20 per cent respectively.

RBI monetary stance is on predicted lines. The policy statement says RBI would maintain its accommodative monetary stance “until there are definite and robust signs of recovery”. But, going forward, RBI would have to reverse expansionary measures to anchor inflation expectations and subdue pressures while preserving the growth momentum. “An exit strategy will be modulated in accordance with evolving macro-economic developments,“ it said.

Globally, while there are some signs of easing of the pace of economic contraction, there is uncertainty about timing of recovery in the developed world. IMF had upgraded growth outlook in developing Asia citing improved prospects in China and India. Strong industrial recovery in China followed large increase in fixed capital investment by public sector and strong credit.

In the case of India, RBI says, the constraint is not one of demand but supply. A critical requirement for accelerated growth is to raise the level of investment, particularly in infrastructure. At the same time, RBI referred to the Government's huge counter-cyclical public spending to make up for decline in domestic demand and said once recovery takes hold, Government would have to return to the path of fiscal consolidation. Large fiscal deficits, if continued, would crowd out private investments and trigger inflationary pressures.

The monetary stance as redefined in the review says RBI would manage liquidity actively so that Government demand is met, ensure flow of credit to private sector at viable rates, and keep vigil on trends and signals of inflation and would respond quickly and effectively through policy adjustments.

The first quarter review of monetary policy has been set against the background of macro-economic developments of 2008/09 and the first quarter (April-May) trends which present a mixed picture. Positive signs of improving business sentiment are clouded by poor monsoon affecting kharif sowings, especially paddy, inflationary expectations from a drive-up in food prices, increased international commodity prices, especially oil, and expansionary fiscal policy. The outlook for exports remains bleak due to persistence of global recession.. The major constraint for higher growth remains the weakening of aggregate demand, especially domestic demand (private consumption and investment).

Feeble signs of recovery in the first quarter of 2009/10 are seen in industry emerging out of negative phase in the first two months (April-May), better performance in core infrastructure (cement, coal and electricity), improving corporate sector in terms of sales and profitability and more optimistic business expectations. But dampening factors include the delayed monsoon, negative growth in capital goods, decline in production of commercial vehicles and accelerated fall in import growth suggesting weaker demand conditions.

Inflation looks like firming up in coming months. RBI refers to CPI remaining at elevated levels in a range of 8.6 to 11 per cent for different consumer price indices. The inflationary pressures may remain moderate, RBI noted, if the protracted global recession leads to dampened commodity prices, agricultural growth remains unaffected despite the delayed progress of monsoon, and the accommodative monetary policy stance returns to normal levels (IPA Service)