1. Monetary and Credit Policy for the year 2003-04 Rakesh Mohan Deputy Governor Reserve Bank of India

2. Structure of presentation  Macroeconomic and Monetary Developments  Developments during 2002-03  Projections for 2003-04 Stance of Monetary Policy 2003-04

3. Macroeconomic and Monetary Developments 2002-03 GDP growth revised downwards : 4.4 per cent Decline in output from agriculture : 3.1 percent. Industry ( 5.8 per cent), and Services sector growth (7.1 per cent) higher than previous year  Difference between RBI’s October projections (5.0 – 5.5 per cent) and now is on account of intensity of drought

4. Macroeconomic and Monetary Developments 2002-03 WPI on point to point basis : 6.2 per cent WPI on Average Basis : 3.3 per cent Higher inflation mainly on account of non-food articles and mineral oils  Mineral oils  Oilseeds  Edible oils  Oil cakes  Fibres

5. Macroeconomic and Monetary Developments 2002-03 All Monetary Indicators in Trajectory M3 growth at 15.0 per cent; (12.1 net of mergers) Growth in aggregate deposits at16.1 per cent; (12.2 per cent net of mergers) Growth in RM low (9.2 per cent) despite substantial accretion to NFA Sustained increase in credit flow to commercial sector at 25 per cent

6. Macroeconomic and Monetary Developments 2002-03 Further Decline in Interest Rates in 2002-03 Government Yield down by by 210 basis points Yield on non-Government debt witnessed sharper reduction Liquidity managed judiciously by means of OMOs and LAF operations. Sharp reduction in long term deposit rate. Flattening of deposit rate structure. Modest decline in lending rates Policy Rates reflected overall softening of interest rates  Bank rate from 8.0 per cent in 2000 to 6.25 per cent in October 2002  Repo rate from 8.0 per cent in March 1999 to 5.0 per cent in March 2003

7. Macroeconomic and Monetary Projections 2003-04 GDP growth projected at 6.0 per cent If Rainfall is around 96 per cent of long-term average Inflation outlook at 5.0 – 5.5 per cent Higher base level of prices at end-March 2003 Expected decline in oil prices Expectations regarding behaviour of Monsoon M3 growth projected at 14.0 per cent. Non food credit expected to grow by 15.0-16.0 per cent.

8. Structure of presentation  Macroeconomic and Monetary Developments  Developments during 2002-03  Projections for 2003-04  Stance of Monetary Policy 2003-04

9. Monetary Policy Stance Provision of adequate liquidity to meet credit growth Preference for a soft and flexible interest rate environment.

10. Monetary Policy Stance Monetary Measures Bank Rate reduced by 25 basis points to 6.0 per cent Not going far because of inflationary concerns To be kept stable until October, 2003 CRR cut by 25 basis points to 4.50 per cent effective June 14, 2003.

11. Monetary Policy Stance Overall Message Serves to balance concern about inflation and concern about growth Policy in favour of maintaining liquidity and soft interest rate bias rather than tightening monetary policy Support to growth through higher credit growth Aim to contain inflation through other means