It restored the statutory liquidity ratio (SLR) to 25% to their net demand and timelines (NDTL) with effect from November 7, 2009. This would not warrant a significant change in the situation as on an aggregate level the commercial banks are maintaining SLR at 27.6%. According to the RBI Governor Dr D Subbarao has been reverted to its normal position, while the other liberal monetary policies would continue to help the ailing economy.

The bank rate has been retained at 6%, repo rate under liquidity adjustment facility (LAF) has been retained at 4.75%, reverse repo rate under LAF has been retained at 3.25% and CRR has been retained at 5% of their net demand and timelines (NDTL).

Keeping in view the global trend in commodity prices and the domestic demand-supply balance, the RBI has projected that the price inflation based on the movement of wholesale price index (WPI) at 6.5% by end-March, 2010. This is higher than the 5% WPI inflation projected by the RBI in its first quarter review in July 2009 as the upside risks have materialized.

The RBI second quarter reviews of 2009-10 - one on macroeconomics and monetary development released on Monday and the other on monetary policy released on Tuesday blamed the rising food prices as primary cause for inflation, particularly that of milk and milk products, oil cakes, sugar and vegetables. The situation of rising food prices is due the supply side constraints, partly caused by drought and the expected decline in farm production and not due to demand constraints.

Though anchoring price inflation expectations is the core responsibility of the country's central banking system, Subbaro washes off his hands and says : “monetary policy is not an effective instrument to manage food prices.”

Retail prices of commodities are at present ruling high. When the price inflation measured by WPI was hovering around zero per cent in this fiscal year, that measured by the four consumer price indices (CPIs) were at double-digit percentage points. However, Subbarao expects a seasonal decline in food prices in the period November, 2009 to January 2010 with good prospects of North-East Monsoon over parts of South India. The southern part of the country has recently suffered heavy loss of crops and property due to floods in the South-West Monsoon.

Growth in broad money supply (M3), which is partly responsible for rising prices, has increased from 18.6% in end-March, 2009 to 18.9% in October 9, 2009, surpassing the indicative trajectory level of 18% stipulated by the RBI in its annual policy statement of April 2009. A major source of M3 expansion this year has been the banking system's financing of the large market borrowing of the government, including purchases through open market operation (OMO) by the RBI.

Over 80% of the market borrowing programme for 2009-10 is over and up to October 9, 2009, credit has expanded by Rs 1,14,800 crore. Thus to attain the projected growth of 20% , banks will need to expand credit by Rs 4,40,000 crore in the remaining part of the year, which will be difficult unless demand for retail credit accelerates. Also, access of corporates to non-bank sources of financing, both domestic and international, has eased, which could lead to substitution of bank credit. While credit demand is expected to pick up in the second half of 2009-10, attaining the projected growth of 20% is unlikely, according to the RBI's mid-year review.

The RBI has done its best to dole out as much as possible to bail out the Indian economy from the impact of global financial crisis. Also the government has come out with a stimulus package. Similar is the case world over. Subbarao says that he, during his tenure, has already presented five quarterly reviews of RBI. There is not much elbow space left to maneuver a new strategy in the given situation.

The RBI mid-year entertains a ray of hope and says “the global economy has begun to recover from the deep recession set off by financial crisis. This recovery is underpinned by output expansion in emerging market economies (EMEs), particularly those in Asia.”

The major emerging economies of Asia are India and China which are partly insulated from the impact of global financial crisis as they have not yet fully opened up their banking and financial sectors. In many other ways both these countries have not yet opened up some crucial sectors. This is one of the main reasons for being partly insulted from the adverse impact. Exports and imports have been affected due to recession. The output expansion in EMEs cannot be to an unlimited extent. It has to be in tune with the demand expansion, which is severely constrained by the global recession. However, the RBI mid-year review admits that the pace and the shape of recovery from the global financial crisis remain uncertain. This suggests that the world leaders need to work on an viable alternative global financial and economic order, instead of pinning hopes on revival of an ailing system.