Page 232 - DECO201_MACRO_ECONOMICS_ENGLISH

Unit 13: Macro Economic Policies: Monetary Policy

So, this just confirmed what Kohli said. She added this could be interpreted in two ways. First, Notes
spending on consumption and production is increasing as economy has recovered from recession.
Second, it could be people are spending now as they expect higher inflation in future. Higher
inflation in future could also lead to higher returns on assets and property in future, therefore,
people are preferring to spend now.
It will be interesting to watch trends in M and M from now on as well.
1 3
RBI also outlined downside risks with its projections:
First, there is still substantial uncertainty about the pace and shape of global recovery.

Second, if the global recovery does gain momentum, commodity and energy prices, which
have been on the rise during the last one year, may harden further. This could put upwards
pressure on inflation
Third, monsoon will continue to play a vital role both from domestic demand and inflation
perspective.

Fourth, policies in advanced economies are likely to remain highly expansionary. High
liquidity in global markets coupled with higher growth in emerging economies foreign
capital flows are expected to remain higher. This will put pressure on exchange rate
policy. RBI usually does not comment on its exchange rate policy. As the economic situation
is exceptional, RBI also commented on India’s exchange rate policy.
Our exchange rate policy is not guided by a fixed or pre-announced target or band. Our policy has been to
retain the flexibility to intervene in the market to manage excessive volatility and disruptions to the Macro
Economic situation. Recent experience has underscored the issue of large and often volatile capital flows
influencing exchange rate movements against the grain of economic fundamentals and current account
balances. There is, therefore, a need to be vigilant against the build-up of sharp and volatile exchange rate
movements and its potentially harmful impact on the real economy.

Policy Stance

The policy stance remains unchanged from January 2010 policy.

Table 13.3: Comparing RBI’s Policy Stance
October 2009 Policy January 2010 Policy April 2010 Policy
Watch inflation trend Anchor inflation expectations, Anchor inflation expectations,
and be prepared to while being prepared to while being prepared to
respond swiftly and respond appropriately, swiftly respond appropriately, swiftly
effectively and effectively to further and effectively to further
build-up of inflationary build-up of inflationary
pressures. pressures.
Monitor liquidity to Actively manage liquidity to Actively manage liquidity to
meet credit demands of ensure that the growth in ensure that the growth in
productive sectors demand for credit by both the demand for credit by both the
while securing price private and public sectors is private and public sectors is
and financial stability satisfied in a non-disruptive satisfied in a non-disruptive
way. way.
Maintain monetary and Maintain an interest rate Maintain an interest rate
interest rate regime regime consistent with price, regime consistent with price,
consistent with price output and financial stability. output and financial stability.
and financial stability,
and supportive of the
growth process
Source: RBI

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