WHAT IS MONETARY POLICY?

Monetary policy is the management of money supply and interest rates by central banks to
influence prices and employment. Monetary policy works through expansion or contraction of
investment and consumption expenditure.

Monetary policy is the process by which the government, central

bank (RBI in India), or monetary authority of a country controls
(i) the supply of money
(ii) availability of money
(iii) cost of money or rate of interest , in order to attain a set of
objectives oriented towards the growth and stability of the economy.

.Monetary policy is referred to as either being an expansionary policy, or a contractionary

policy, where an expansionary policy increases the total supply of money in the economy, and a
contractionary policy decreases the total money supply. Expansionary policy is traditionally
used to combat unemployment in a recession by lowering interest rates, while contractionary
policy involves raising interest rates in order to combat inflation. Monetary policy is contrasted
with fiscal policy, which refers to government borrowing, spending and taxation

WHY IT IS NEEDED?
What monetary policy – at its best – can deliver is low and stable inflation, and thereby reduces
the volatility of the business cycle. When inflationary pressures build up, it is monetary policy
only which raises the short-term interest rate (the policy rate), which raises real rates across
the economy and squeezes consumption and investment.
The pain is not concentrated at a few points, as is the case with government interventions in
commodity markets.
Monetary policy in India underwent significant changes in the 1990s as the Indian Economy
became increasing open and financial sector reforms were put in place. In the 1980s, monetary
policy was geared towards controlling the quantum, cost and directions of credit flow in
the economy. The quantity variables dominated as the transmission Channel of monetary
policy. Reforms during the 1990s enhanced the sensitivity of price signals from the central
bank, making interest rates the increasingly Dominant transmission channel of monetary
policy in India.

OBJECTIVES OF MONETARY POLICY

The objectives are to maintain price stability and ensure adequate flow of credit to the
productive sectors of the economy. Stability for the national currency (after looking at
prevailing economic conditions), growth in employment and income are also looked into.
The monetary policy affects the real sector through long and variable periods while the financial
markets are also impacted through short term implications.
There are four main 'channels' which the RBI looks at:
· Quantum channel: money supply and credit (affects real output and price level through
changes in reserves money, money supply and credit aggregates).
· Interest rate channel.
· Exchange rate channel (linked to the currency).
· Asset price.

Instruments of monetary policy in india

The monetary policy is nothing but controlling the supply of Money. The big Daddy, i.e. the RBI
takes a look at the present levels and also takes a call on what should be the desired level to
promote growth, bring stability of price(low inflation) and foreign exchange.
The various instruments of monetary policy that the RBI has and can use are :
A. Quantitative measures:
1. Open Market operations: Here, the RBI enters into sale and purchase of government
securities and treasury bills. So the RBI can pump money into circulation by buying back the
securities and vice versa. In absence of an independent security market (all Banks are state
owned), this is not really effective in India.
2. Bank rate policy: Popularly known as repo rate and reverse repo rate, it is the rate at which
the RBI and the Banks buy or exchange money. This resuts into the flow of bank credit and
thus effects the money supply.
3. Cash Reserve ratio (CRR): This is the percentage of total deposits that the banks have to keep
with RBI. And this instrument can change the money supply overnight.
4. Statutory Liquidity Requirement (SLR): This is the proportion of deposits which Banks have to
keep liquid in addition to CRR.
This also has a bearing on money supply.
B. Qualitative measures:
1. Credit rationing: Imposing limits and charging higher/lower rates of interests in selective
sectors is what you see is being done by RBI.
2. Moral suasion: We hear of RBI's directive of priority lending in Agriculture sector. Seems
more of a directive rather than persuasion.

The key policy initiatives taken by the Reserve Bank since September 2008 are set
out below:
Policy Rates
• The policy repo rate under the liquidity adjustment facility (LAF) was reduced by 400 basis
points from 9.0 per cent to 4.75 percent.
• The policy reverse repo rate under the LAF was reduced by 250 basis points from 6.0 per cent
to 3.25 per cent.
Rupee Liquidity
• The cash reserve ratio (CRR) was reduced by 400 basis points from 9.0 per cent of net demand
and time liabilities (NDTL) of banks to 5.0 per cent.
• The statutory liquidity ratio (SLR) was reduced from 25.0 per cent of NDTL to 24.0 per cent.
• The export credit refinance limit for commercial banks was enhanced to 50.0 per cent from
15.0 per cent of outstanding export credit.
• A special 14-day term repo facility was instituted for commercial banks up to 1.5 per cent of
NDTL.
• A special refinance facility was instituted for scheduled commercial banks (excluding RRBs) up
to 1.0 per cent of each bank’s NDTL as on October 24, 2008.
• Special refinance facilities were instituted for financial institutions (SIDBI, NHB and Exim
Bank).
Forex Liquidity
• The Reserve Bank sold foreign exchange (US dollars) and made available a forex swap facility
to banks.
• The interest rate ceilings on nonresident Indian (NRI) deposits were raised.
• The all-in-cost ceiling for the external commercial borrowings (ECBs) was raised. The all-in-
cost ceiling for ECBs through the approval route has been dispensed with up to June 30, 2009.
• The systemically important non-deposit taking non-banking financial companies (NBFCs-NDSI)
were permitted to raise short-term foreign currency borrowings. Regulatory Forbearance
• The risk-weights and provisioning requirements were relaxed and restructuring of stressed
assets was initiated.

Highlights of the Monetary Policy

• CRR kept unchanged; stands at 5.0%
• SLR kept unchanged; stands at 24%
• Repo rate kept unchanged; stands at 5.5%
• Reverse Repo rate kept unchanged; stands at 4.0%
• Bank rate kept unchanged at 6.0%
• GDP Growth forecast scaled down to 7.0% with a downward bias
• Inflation expected below 3.0% by March 2009
• Will keep watch on all the inflation indices for deciding key
policy measures
• Sees no recovery before late 2009
• Credit growth target revised to 24% from 20%
• Money supply growth target revised to 19% from 16.5%-17%
Key policy rates since 15TH Sept. 2008
Changes in monetary policies that have come due to global crisis (depression):
The policy responses in India since September 2008 have been designed largely to mitigate the
adverse impact of the global financial crisis on the Indian economy. The conduct of monetary
policy had to contend with the high speed and magnitude of the external shock and
its spill-over effects through the real, financial and confidence channels. The evolving stance of
policy has been increasingly conditioned by the need to preserve financial stability while
arresting the moderation in the growth momentum.

The Reserve Bank has multiple instruments at its command such as repo and reverse repo
rates; cash reserve ratio (CRR), statutory liquidity ratio (SLR), open market operations, including
the market stabilisation scheme (MSS) and the LAF, special market operations,
and sector specific liquidity facilities. In addition, the Reserve Bank also uses prudential tools to
modulate flow of credit to certain sectors consistent with financial stability. The availability of
multiple instruments and flexible use of these instruments in the implementation of monetary
policy has enabled the Reserve Bank to modulate the liquidity and interest rate conditions
amidst uncertain global macroeconomic conditions.
The thrust of the various policy initiatives by the Reserve Bank has been on providing ample
rupee liquidity, ensuring comfortable dollar liquidity and maintaining a market environment
conducive for the continued flow of credit to productive sectors.
2008 saw record trade deficits due to the surge in oil prices. The subsequent plunge
in commodity prices failed to materialize into substantial current account gains in 2008 due to
dismal export performance and since the rupee had depreciated considerably. The significant
drop in imports in 2009 lead to an improvement in the current account deficit in Q1-09 after a
marked deterioration in the last three quarters of 2008. The overall balance of payment (BOP)
figures for H1-08 showed a surplus, but by H2-08 this no longer held true. H1-09 BOP balance is
now once again in positive territory due to a firming on the capital account side but the current
account side has weakened in Q2-09. Foreign reserves, while sizeable, had been pressured in
recent months, but picked up again in July reaching over USD 261 billion and representing over
9.4 months of current account debit cover. The external debt is small at 18.7% of
GDP supporting solvency. The rupee depreciated in 2008, losing 20.7% against the USD, but in
2009 it has regained some of its lost strength.
Outlook: Growth will slide to 5.8% in CY-2009 and 6.2% in CY-2010, while the medium term
outlook remains favourable. While elections have ended, the push for substantial reforms is
expected to be limited despite reformist appetite. The move towards gradual liberalization and
deregulation will continue under the new government; but a major overhaul is unlikely. The
dire state of the country’s infrastructure will need to be addressed, since it is not at par with
the economy’s stance in Asia. The effect of pre-election spending and the stimulus package as
growth boosters will begin to fade with added pressure due to low monsoon rainfall. We expect
medium term growth to return to its current growth potential of 7-8% but not
before 2011.

The Indian economy looked to be relatively insulated from the global financial crisis that started in
August 2007 when the sub-prime mortgage crisis first surfaced in the United States (US). In fact, the
Reserve Bank of India (RBI) was raising interest rates until August 2008 with the explicit objective of
cooling the economy and bringing down the gross domestic product (GDP) growth rate, which visibly
had moved above the rate of potential output growth and was contributing to the build up of
inflationary pressures in the economy.1 But when the collapse of Lehman Brothers on 23 September
2008 morphed the US financial meltdown into a global economic downturn, the impact on the Indian
economy was almost immediate. As an impact on India the External credit flows suddenly dried up and
the overnight money market interest rate spiked to above 20% and remained high for the next month. It
is perhaps judicious to assume that the impacts of the global economic downturn on the Indian
economy are still unfolding. RBI which had a tight monetary policy since years began loosening it after
the crisis.However after the rising inflation again in 2009 its has started to tighten its policies once again.

Like all emerging economies, India too has been impacted by the crisis, and by much more than
what was expected earlier.  The extent of impact has caused dismay, mainly on two grounds:
first, because our financial sector remains healthy, has had no direct exposure to tainted assets
and its off-balance sheet activities have been limited; and second, because India’s merchandise
exports, at less than 15 per cent of GDP, are relatively modest.  Despite these mitigating factors,
the impact of the crisis on India evidences the force of globalisation as also India’s growing two-
way trade in goods and services and financial integration with the rest of the world.

After clocking annual growth of 8.9 per cent on an average over the last five years (2003-08),
India was headed for a cyclical downturn in 2008-09.  But the growth moderation has been
much sharper because of the negative impact of the crisis.   In fact, in the first two quarters of
2008-09, the growth slowdown was quite modest; the full impact of the crisis began to be felt
post-Lehman in the third quarter, which recorded a sharp downturn in growth.   The services
sector, which has been our prime growth engine for the last five years, is slowing, mainly in
construction, transport and communication, trade, hotels and restaurants sub-sectors.  For the
first time in seven years, exports have declined in absolute terms for five months in a row
during October 2008-February 2009.  Recent data indicate that the demand for bank credit is
slackening despite comfortable liquidity in the system.  Dampened demand has dented
corporate margins while the uncertainty surrounding the crisis has affected business
confidence.  The index of industrial production (IIP) has been nearly stagnant in the last five
months (October 2008 to February 2009), of which two months registered negative growth. 
Investment demand has also decelerated.  All these indicators suggest that growth will
moderate more than what had been expected earlier. 
 
Despite the adverse impact as noted above, there are several comforting factors that have
helped India weather the crisis.  First, our financial markets, particularly our banks, have
continued to function normally.  Second, India’s comfortable foreign exchange reserves provide
confidence in our ability to manage our balance of payments notwithstanding lower export
demand and dampened capital flows.  Third, headline inflation, as measured by the wholesale
price index (WPI), has declined sharply. Consumer price inflation too has begun to moderate. 
Fourth, because of mandated agricultural lending and social safety-net programmes, rural
demand continues to be robust.

Growth in key monetary aggregates – reserve money (RM) and money supply (M3) – in 2008-
09 reflected the changing liquidity positions arising from domestic and global financial
conditions and the monetary policy response. Reserve money variations during 2008-09 largely
reflected the increase in the currency in circulation and reduction in the cash reserve ratio
(CRR) of banks.

As indicated in the Third Quarter Review, reduction in the CRR has three inter-related effects
on reserve money. First, it reduces reserve money as bankers’ required cash deposits with the
Reserve Bank fall. Second, the money multiplier rises. Third, with the increase in the money
multiplier, M3 expands with a lag. While the initial expansionary effect is strong, the full effect
is felt in 4-6 months. Reflecting these changes, the year-on-year increase in reserve money in
2008-09 was much lower than in the previous year.  However, adjusted for the first round
effect of CRR reduction, deceleration in reserve money growth was less pronounced. The
annual M3 growth in 2008-09, though lower compared with the previous year, was also below
the trajectory projected in the Third Quarter Review of January 2009

 
Table 10: Annual Variations in Monetary Aggregates 
(Per cent)
Item Annual Variations
2007-08 2008-09
Reserve Money 31.0 6.4
Reserve Money (adjusted for CRR changes) 25.3 19.0
Currency in Circulation 17.2 17.0
Money Supply (M3) 21.2 18.4
M3 (Policy Projection) 17.0-17.5* 19.0**
Money Multiplier 4.33 4.82
*Policy projection for the financial year as indicated in the Annual Policy Statement 2008-09 (April 2008).
**Policy projection for the financial year as indicated in the Third Quarter Review of  Monetary Policy  
 2008-09 (January 2009).

Monetary management during 2008-09 was dominated by the response to the spillover effects
of global financial crisis and the need to address slackening of domestic demand conditions,
especially during the third quarter. As the Reserve Bank had to provide foreign exchange
liquidity to meet the demand from importers and contain volatility in the foreign exchange
market arising out of capital outflows by foreign institutional investors (FIIs), its net foreign
exchange assets (NFEA) declined. This had an overall contractionary effect on rupee liquidity.
The Reserve Bank addressed this issue by providing rupee liquidity through expansion of net
 domestic assets (NDA) by (i) conventional open market operations; (ii) special 14-day term repo
facility for banks; (iii)  buy-back of securities held under the market stabilisation scheme; (iv)
special market operations, including the purchase of oil bonds; (v) enlargement of export credit
refinance window; (vi) special refinance facility for banks for addressing the liquidity concerns
of NBFCs, mutual funds and housing finance companies; (vii) special refinance facility for
financial institutions (SIDBI, NHB and Exim Bank); and (viii) funding to NBFCs through a special
purpose vehicle (SPV). Thus, a notable feature of monetary operations during the second half of
2008-09 was the substitution of foreign assets by domestic assets. Consequently, liquidity
conditions have remained comfortable since mid-November 2008 as reflected in the LAF
window being generally in the absorption mode and the call/notice rate remaining near or
below the lower bound of the LAF corridor consistent with the stance of monetary policy.

Since mid-September 2008, the Reserve Bank has cut the repo rate by 400 basis points and the
reverse repo rate by 250 basis points. The CRR was also reduced by 400 basis points of NDTL of
banks

Table 15: Monetary Easing by the Reserve Bank since mid-September 2008
(Per cent)
As at Extent of Reduction
Instrument Mid-September 2008 Early March 2009 (basis points)
Repo Rate 9.00 5.00 400
Reverse Repo 6.00 3.50 250
Cash Reserve Ratio @ 9.00 5.00 400
@ Percentage of NDTL.
 
Taking cues from the reduction in the Reserve Bank’s policy rates and easy liquidity conditions,
all public sector banks, most private sector banks and some foreign banks have reduced their
deposit and lending rates. The reduction in the range of term deposit rates between October
2008 - April 18, 2009 has been 125-250 basis points by public sector banks, 75-200 basis points
by private sector banks and 100-200 basis points by five major foreign banks. The reduction in
the range of BPLRs was 125-225 basis points by public sector banks, followed by 100-125 basis
points by private sector banks and 100 basis points by five major foreign banks

The efficacy of the monetary transmission mechanism hinges on the extent and the speed with
which changes in the central bank’s policy rate are transmitted through the term-structure of
interest rates across markets. While the response to policy changes by the Reserve Bank has
been faster in the money and government securities markets,  there has been concern that the
large and quick changes effected in the policy rates by the Reserve Bank have not fully
transmitted to banks’ lending rates.  During the second half of 2008-09, while the Reserve Bank
has reduced its lending rate (repo rate) by 400 basis points, most banks have lowered their
lending rate in the range of 50-150 basis points.

The adjustment in market interest rates in response to changes in policy rates gets reflected
with some lag. However, the transmission to the credit market is somewhat slow on account of
several structural rigidities.  In this context, banks have brought out the following constraints in
their discussions with the Reserve Bank. First, the administered interest rate structure of small
savings acts as a floor to deposit interest rates. Without reduction in deposit rates, banks find it
difficult to reduce lending rates exclusively on policy cues. Second, while banks are allowed to
offer ‘variable’ interest rates on longer-term deposits, depositors have a distinct preference for
fixed interest rates on such deposits which results in an asymmetric contractual relationship. In
a rising interest rate scenario, while depositors retain the flexibility to prematurely withdraw
their existing deposits and re-deploy the same at higher interest rates, banks have to
necessarily carry these high cost deposits till their maturity in the downturn of the interest rate
cycle. Third, during periods of credit boom as in 2004-07, competition among banks for
wholesale deposits often hardens deposit interest rates, thereby further increasing the cost of
funds. Fourth, the linkage of concessional administered lending rates, such as for agriculture
and exports, to banks’ BPLRs makes overall lending rates less flexible. Fifth, the persistence of
large volumes of market borrowing by the government hardens interest rate expectations.
From the real economy perspective, however, for monetary policy to have demand-inducing
effects, lending rates will have to come down.

The changes in BPLR do not fully reflect the changes in the effective lending rates. During the
pre-policy consultations with the Reserve Bank, banks pointed out that lending rates should not
be assessed only in terms of reduction in BPLRs since as much as three-quarters of lending is at
rates below BPLR which includes lending to agriculture, export sector, and well-rated
companies, including PSUs. The weighted average lending rate, which was 11.9 per cent in
2006-07, increased to 12.3 per cent (provisional) in 2007-08.  According to the information
collected from select banks, the average yield on advances, a proxy measure of effective
lending rate, in 2008-09 was around 10.9 per cent.  As most of the commercial banks have cut
their BPLRs in the second half of 2008-09, the effective lending rate towards the end of 2008-09
could be even lower than 10.9 per cent. Nevertheless, it may be noted that current deposit and
lending rates are now higher than in 2004-2007, although the policy rates are now lower than
in that period. This is reflective of the hysteresis in the system. Reduction in public sector banks
deposit rates in 1-3 year maturity from 9.50-10.75 per cent in October 2008 to 7.00-8.75 per
cent by April 2009 has not been commensurate with the moderation in inflation. Judging from
the experience of 2004-07, deposit rates can be lower and should come down.

 Notwithstanding the above factors, there is still a scope for banks to reduce their lending
rates.  Pointing to the current WPI inflation rate near zero, some have argued that real lending
rates are very high. The point-to-point variations in WPI exaggerate the level of real interest
rate due to divergence between various price indices as also the inflation expectations. 
Notwithstanding computational challenges, even when inflation is taken as 4.0-4.5 per cent
based on the underlying trend, real lending rates would still appear to be high.  Banks,
therefore, must strive to reduce their lending rates further.

Inflation
The headline inflation, as measured by year-on-year variations in the wholesale price index
(WPI), which remained negative during June-August 2009 due to the base effect, returned to
positive territory in September 2009. WPI inflation was 1.21 per cent on October 10, 2009 as
compared with 11.30 per cent a
year ago, and 0.84 per cent at end-March 2009. During the current financial year (up to October
10, 2009), WPI has increased by 5.95 per cent reflecting higher food price inflation aggravated
by deficient monsoon.
The upside risk of deficient monsoon rainfall projected in the First Quarter Review of July 2009
has since materialised and prices of primary food items and manufactured food products have
risen due to short supply. During the current financial year the increases in prices of wheat (3.5
per cent) and rice (5.9 per cent) were relatively low as supply side pressures were mitigated by
the comfortable levels of foodgrain stocks with public agencies which stood at 44.3 million
tonnes as on October 1, 2009 as against the minimum stock norm of 16.2 million tonnes.
However, large increases were recorded in prices of vegetables (59.3 per cent), tea (30.7 per
cent), sugar, khandsari and gur (28.7 per cent), egg, meat and fish (25.3 per cent), pulses (19.2
per cent), jowar (14.9 per cent), condiments and spices (14.2 per cent), milk (7.0 per cent) and
fruits (5.2 per cent).
The current inflationary pressures, as WPI moves from negative to positive territory, are quite
different from the inflationary pressures witnessed in April- October 2008. Although both
inflation episodes are driven by supply side pressures, the inflation in 2008 was triggered largely
by a sharp increase in the prices of basic metals and mineral oils. In contrast, during the current
episode, price pressures are emanating from domestic sources reflecting increase in prices of
food articles and food products.
With the objective of maintaining price stability alongside a reasonable rate of economic
growth, the last two years have been very hectic for policymakers at the RBI. After a
comfortable period of low inflation, the Indian economy started feeling the pressure of rising
global commodity prices in the first quarter of FY2004–2005. In response to this rise in inflation,
the RBI started tightening monetary policy in September 2004, raising the cash reserve ratios
from 4.5% to 5.0%. As the inflationary situation worsened in the subsequent period, the
tightening of monetary policy became even more aggressive. Consequently, inflation declined
from around 8% in the middle of 2004 to less than 4% in September 2007. Nevertheless,
coinciding with the rising global inflation trends, domestic inflation once again started
increasing towards the end of 2007 and became a major headline in the first week of June 2008
when it entered the double-digit range for first time since the 1991 BOP crisis. It drew a sharp
reaction from the RBI and the speed of monetary tightening was further increased. This credit
tightening from FY2004–2005 onward ensured a soft landing of Indian economy, which began
overheating over the past three years with the actual growth rate exceeding its potential
growth rate. As a result the growth rate began to slow down from the middle of FY2007–2008.
As a result of the policy rate cuts, the prime lending rates of commercial banks have come
down from 13.75–14.0% in October 2008 to 12.0–12.5% January 2009. The call money rates
have also remained stable at low levels and the overnight money market rate has remained
within the liquidity adjustment-facility corridor

How effective is monetary policy in India

( A critical analysis)
The specter of inflation has led the Reserve Bank of India (RBI) to repeatedly raise interest rates
and increase banks’ reserve requirements in classic monetary policy responses. The RBI also
faces the challenge of simultaneously managing the exchange rate in the face of porous
controls on international capital flows.
While the exchange rate has depreciated recently as capital inflows have cooled, the hot button
issue just a few months ago was whether the exchange rate should be kept from appreciating.
Some economists argued for preventing exchange rate appreciation, and managing the
inflationary impact of capital inflows by selling government bonds, thus soaking up excess
liquidity. Others favored an “export-competitive” exchange rate policy, but also argued that
monetary policy was irrelevant as current inflationary symptoms were arising from temporary
supply-side shocks. The “radical” position (at least by Indian policy standards) has been that the
RBI should focus on fighting inflation, but give itself more room to do so by allowing the
exchange rate to adjust to market conditions. One version of this stance is that raising the
interest rate is less effective as an inflation fighting policy than allowing the rupee to
appreciate, as financial repression and underdeveloped financial markets keep interest rate
changes from rippling through the economy strongly enough. There are several empirical
analyses of the “monetary transmission mechanism” in India. These suggest that the interest
rate channel of monetary policy has strengthened since 1998, which should not come
as a surprise since there has been considerable financial liberalization, accompanied by a
revision of the RBI’s policy approach. This result comes out in an interesting fashion in a 2005
IMF study.The responses of firms to monetary tightening vary by size and, while greater in the
period 1998-2003 versus the prior half-decade, seem to involve a reversal of initial cutbacks in
corporate debt. Still, interest rates do affect firm borrowing behavior.
A better feel for the aggregate impacts of monetary policy comes from an economy wide
analysis. This suggests the interest rate is an effective inflation-fighting tool in India even
though, as the authorssay, “the financial market in India is not yet matured.”
The results even indicate that output recovers with a lag in the face of such interest rate
increases. All this sounds quite good from the perspective of what policymakers are currently
doing, though there is no modeling of inflation expectations in India that we are aware of,
and that issue seems to also be driving monetary policy. In contrast to interest rate policy, in
the estimations there is no long run link between monetary aggregates and output, rendering
such aggregates less reliable as targets or indicators for policymakers.
Indian monetary policy is still very accommodative and interest rates need to rise more to
prevent global supply-side shocks from seeping into the broader economy.
Wholesale price inflation, the most widely watched measure in India, touched 8.24 percent in
mid-May, far above the central bank's comfort zone of 5.5 percent for 2008/09.
The central bank held off outright rate increases for a year, opting instead to keep cash
availability tight, as prices pressures largely came from supply constraints and record
commodity prices rather than demand. The twin objectives of monetary policy in India have
evolved as maintaining price stability and ensuring adequate flow of credit to facilitate the
growth process.

RBI’s Policy Stance

Going forward, the Reserve Bank’s policy stance will continue to be to maintain comfortable
rupee and forex liquidity positions. The Annual Policy Statement, 2009-10 announced on April
21, 2009 stated the following policy stance:
• Ensure a policy regime that will enable credit expansion at viable rates while preserving credit
quality so as to support the return of the economy to a high growth path.
 • Continuously monitor the global and domestic conditions and respond swiftly and effectively
through policy adjustments as warranted so as to minimise the impact of adverse
developments and reinforce the impact of positive developments.
• Maintain a monetary and interest rate regime supportive of price stability and financial
stability taking into account the emerging lessons of the global financial crisis.
The Reserve Bank of India has been actively engaged in policy action to minimise the impact of
the global crisis on India. The policy response of the Reserve Bank has helped in keeping India’s
financial markets functioning in a normal manner and in arresting the growth moderation. The
Reserve Bank will continue to maintain vigil, monitor domestic and global developments, and
take swift and effective action to minimise the impact of the crisis and restore the economy to a
high growth path consistent with price and financial stability.

Monetary Projection
 Monetary and credit aggregates have witnessed deceleration since their peak levels in October
2008. The liquidity overhang emanating from the earlier surge in capital inflows has
substantially moderated in 2008-09. The Reserve Bank is committed to providing ample
liquidity for all productive activities on a continuous basis. As the upside risks to inflation have
declined, monetary policy has been responding to slackening economic growth in the context of
significant global stress. Accordingly, for policy purposes, money supply (M3) growth for 2009-
10 is placed at 17.0 per cent. Consistent with this, aggregate deposits of scheduled commercial
banks are projected to grow by 18.0 per cent. The growth in adjusted non-food credit, including
investment in bonds/debentures/shares of public sector undertakings and private corporate
sector and CPs, is placed at 20.0 per cent.  Given the wide dispersion in credit growth noticed
across bank groups during 2008-09, banks with strong deposit base should endeavour to
expand credit beyond 20.0 per cent. As always, these numbers are provided as indicative
projections and not as targets.

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