Announcing its Annual Policy for 2011-12 the Reserve Bank today announced that it was aiming to maintain an interest rate environment that moderated inflation, foster an environment of price stability that would sustain growth in the medium-term and to manage liquidity to ensure that it remains broadly in balance.

RBI justified its moves by the trend of moderating inflation and consolidating growth in the second and third quarters of 2010-11. But, it pointed out the resurgence of inflation in the last quarter of last year was a matter of concern. The trigger for this was the sharp uptrend in international commodity prices, it said.

Over the long run, RBI said, high inflation was inimical to sustained growth as it harmed investment by creating uncertainty. The current elevated rates of inflation posed significant risks to future growth. Bringing them down, therefore, even at the cost of some growth in the short-run, should take precedence.

Thus, RBI has taken the monetary policy stance:

RBI has therefore decided to take the following policy measures:

• The repo rate under the liquidity adjustment facility (LAF) has been increased by 50 basis points. Accordingly, it goes up from 6.75 per cent to 7.25 per cent.
• The reverse repo rate under the LAF would stand adjusted at 6.25 per cent.
• The Marginal Standing Facility (MSF) rate, determined with a spread of 100 basis points above the repo rate, has been fixed at 8.25 per cent.
• The Bank Rate remains at 6.0 per cent.
• The cash reserve ratio (CRR) remains unchanged at 6 per cent of NDTL of scheduled banks.

RBI has also decided to increase the Savings Bank Deposit Interest Rate from the present 3.5 per cent to 4.0 per cent with immediate effect.

The Reserve Bank's baseline inflation projections are that inflation will remain elevated, close to the March 2011 level over the first half of 2011-12, before declining. These projections factor in an upward revision of petrol and diesel prices. While the persistence of inflation over the next few months has been incorporated into this policy, the Reserve Bank will continue to persevere with its anti-inflationary stance.

In its overview of the global and domestic macroeconomic developments RBI said that on the global front, recovery was expected to sustain in 2011 even as it was projected to moderate marginally from its 2010 pace due to the phasing out of the fiscal stimulus, and high oil and other commodity prices. Growth in emerging market economies is also expected to decelerate on account of monetary tightening and rising commodity prices.

The advanced economies are facing inflation pressures from high commodity prices, while inflation pressures for the emerging market economies are stemming from both strong domestic demand and high commodity prices.

RBI said the Indian economy was estimated to have grown by 8.6 per cent last year. Agricultural growth was above trend, while the index of industrial production (IIP), which grew by 10.7 per cent during the first half of last year, moderated subsequently, bringing down the overall growth for April-February 2010-11 to 7.8 per cent. Particularly significant were the slowdown in capital goods production and investment spending.

Going forward, high oil and other commodity prices and the impact of its anti-inflationary monetary stance would moderate growth, RBI saids. Based on the assumption of a normal monsoon, and crude oil prices averaging $110 a barrel over the full year 2011-12, our baseline projection of real GDP growth for 2011-12, for policy purposes, is around 8 per cent.