Monetary Policy: 2008

MEASURES ANNOUNCED

• Repo Rate increased by 50 bps from 8.5 per cent to 9 per cent
• CRR to be hiked by 25 bps to 9 per cent with effect from August 30, 2008
• Bank Rate kept unchanged at 6 per cent
• Reverse Repo Rate under the liquidity adjustment facility (LAF) kept unchanged at 6 per cent

OBJECTIVES

• To ensure credit growth at 20 per cent and deposit growth 17.5 per cent
• Get inflation down from current 11.89-12 per cent to 7 per cent by March 31, 2009. On medium-term, bring it down to 3 per cent.
• Emphasise credit quality as well as credit delivery, in particular, for employment-intensive sectors, while pursuing financial inclusion.
• Moderate monetary expansion and plan for money supply growth of 17 per cent in FY09.
• Help the growth of non-food credit, including investments in shares, bonds, debentures and commercial paper to reach around 20 per cent.
• Give liquidity management priority in the hierarchy of policy objectives.
• Bring about 17.5 per cent growth in aggregate deposits
• Banks should focus on stricter credit appraisals on a sectoral basis

REASONS FOR THE MEASURES

Domestic:

• Y-o-Y basis, CPI-based inflation for agricultural and rural labourers grew to 8.8 per cent and 8.75 per cent respectively in June 2008 from 7.8 per cent and 7.5 per cent a year ago.
• Money supply (M3) increased by 20.5 per cent y-o-y on July 4, 2008, lower than 21.8 per cent a year ago.
• The price of the Indian basket of crude oil increased from $99.4 per barrel in March 2008 to $141.5 on July 3, 2008 before declining to $121.9 on July 25, 2008.

International:

• Exports increased by 21.7 per cent in US dollar terms during the first two months of the current financial year, as compared to 24.2 per cent in the corresponding period of the previous year.
• Imports rose by 31.8 per cent as compared to 37.9 per cent in the corresponding period of the previous year.
• POL imports increased by 48.6 per cent on account of the surge in crude oil prices as compared to 25.7 per cent in the corresponding period of the previous year. As a result, the merchandise trade deficit widened to $20.7 billion during April-May 2008.
• During the current financial year up to July 25, 2008, the rupee depreciated by 5.4 per cent against the dollar, by 5 per cent against the euro, by 5.2 per cent against the pound sterling and by 1.3 per cent against the Japanese yen.

Sourec : RBI Press Release