Highlights of the Credit Policy 2011

The highlights of the Credit Policy announced today are as follows:

• Repo rate is increased by 50 basis points to become 7.25% from 6.75%.
• Reverse repo, which no longer be an independent variable, is increased to 6.25%.
• Cash Reserve Ratio (CRR) remains unchanged at 6%
• Savings bank deposit interest rate increased from 3.5% to 4%.
• Interest rate cap on MFI loans fixed at 26%. RBI will be appointing a committee for reviewing priority sector lending.

 Following are the expectations of the RBI:

• GDP for FY12 is expected to range between 7.4% to 8.5%, with 90% probability.
• Inflation is expected to remain high for the initial half of this fiscal year, after which it is anticipated to cool down to 6%. 

The monetary policy was based on the following three factors: 

• Global commodity prices, which surged in the recent months, are expected to remain more or less stable, with chances of increasing over the course of the fiscal. This has led to the belief that inflation will remain high or even go higher. 
• Core and headline inflation have considerably overshot even the most conservative projections made in the last few months, again hinting toward high inflation. 
• In contrast, the expected moderation in demand would induce reduction in pricing power as well as the scope of 'pass-through' of commodity prices.