Hence, recovery was not assured. Second, globally, most central banks were in favour of continuing stimulus. On the other hand, domestically, consumer price inflation was high, households’ inflation expectations were rising and surplus liquidity was substantial as reflected in the Reserve Bank’s Liquidity Adjustment Facility (LAF) window. These developments had inflationary consequences.
In its Second Quarter Review of Monetary Policy for 2009–10, the Reserve Bank after wider consultations provided the arguments for and against beginning reversal of monetary easing. On balance of considerations, the Reserve Bank judged that the time was appropriate to sequence the exit in a calibrated way so that while the recovery process was not hampered, inflation expectations remained anchored.