While the policy actions would aim to bring down the current intolerable level of inflation to a tolerable level of below 5.0% as soon as possible and around 3.0% over the medium-term, at this juncture a realistic policy endeavour would be to bring down inflation from the current level of about 11.0-12.0% to a level close to 7.0% by March 31, 2009.
It is necessary to moderate monetary expansion and plan for a rate of money supply growth in the range of around 17.0% in FY09 in consonance with the outlook on growth and inflation so as to ensure macroeconomic and financial stability in the period ahead.
Consistent with the projection of money supply, the growth in aggregate deposits in FY09 is now placed at around 17.5% or around Rs 6,00,000 crore.
The growth of non-food credit including investments in bonds/debentures/shares of public sector undertakings and private corporate sector and CP is placed at around 20.0% in FY09, as indicated in the Annual Policy Statement, consistent with the monetary projections.
In view of the evolving environment of heightened uncertainty, volatility in global markets and the dangers of potential spillovers to domestic equity and currency markets, liquidity management will continue to receive priority in the hierarchy of policy objectives over the period ahead.
There is headroom available with the Reserve Bank in terms of the flexibility in the deployment of instruments, complemented by prudential regulations and instruments for capital account management.
In FY09 so far, some banks that have expanded credit rapidly in relation to the system level growth with attendant worsening of their credit-deposit ratios are urged to review their business strategies so that they are in a position to combine longer term viable financing with profitability in operations, recognising the reality of business cycles and countercyclical monetary policy responses.
If necessary, the Reserve Bank would consider undertaking supervisory review of those select banks which are over extended in terms of their credit portfolios relative to their sources of funds.
Banks should focus on stricter credit appraisals on a sectoral basis, monitor loan to value ratios and generally ensure the health of credit portfolios on a durable basis without encountering undue asset-liability mismatches.
In view of growing off-budget liabilities and enhanced expenditures on subsidies, loan waivers and salaries in the rest of the year, fiscal developments warrant close and careful monitoring.
The overriding priority for monetary policy is to eschew any further intensification of inflationary pressures and to firmly anchor inflation expectations.
As stated in the Annual Policy Statement of April 2008, it is critical at this juncture to demonstrate on a continuing basis a determination to act decisively, effectively and swiftly to curb any signs of adverse developments in regard to inflation expectations.
In view of the above unprecedented uncertainties and dilemmas, it is important to take informed judgements with regard to the timing and magnitude of policy actions; and such judgements need to have the benefit of evaluation of incoming information on a continuous basis.
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 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, assuming that capital flows are effectively managed, and keeping in view the current assessment of the economy including the outlook for growth and inflation, the overall stance of monetary policy in 2008-09 will broadly continue to be:
UTVi News Desk