WAT/PIUpdates[Link]
com
HIGHLIGHTSOFRBISREPORTONMACROECONOMICDEVELOPMENTS [AlldataandpointshavebeentakenfromJan29RBIsmonetarypolicereview] Balanceofmacroeconomicriskssuggestsmonetarypolicyneedstobecalibratedinaddressinggrowthrisksas inflationturnssticky
Growthin201213islikelytofallbelowtheReserveBanksbaselineprojectionof5.8percent. [Link], [Link] materialises,inflationpathmayturnsticky. [Link] [Link] WPIinflationisexpectedtomoderatefrom7.5percentin201213to7.0percentin201314.
GLOBALECONOMICCONDITIONS Unconventionalmonetarypoliciesreducestress,butrisksremainahead
[Link] UShasbeenaverted,[Link] signsofgrowthbottomingoutinEmergingMarketandDevelopingEconomies(EMDEs). Signsofstabilisationinglobaleconomicactivityhavebeeninevidenceinrecentmonths,ledbystronger thanexpectedgrowthintheUSinQ3,accelerationinthepaceofactivityinChinaandapickupinindustrial [Link],thoughfinancial marketconfidencehasimproved.JapanhasembarkedonafreshfiscalstimulusfollowingcontractioninQ3. IntheUK,[Link] roseinQ4. Globalinflationscenariomaystaybenignasdemandinadvancedeconomies(AEs)[Link] [Link], upsideriskspersist,withpossiblerecoveryinEMDEsandlargequantitativeeasinginAEs.
INDIANECONOMY Output Growthslowdowncontinues,revivalmaytakesomemoretime
GrowthslowdowninIndiacontinueswithgrowthremainingbelowpotentialforthefifthsuccessivequarter. [Link] moretime. Rabicropisexpectedtobenormaldespitedeficientrains,butisunlikelytofullycompensateforkharif [Link]. Page1
EssaysforIIM.com200913
WAT/PIUpdates[Link]
[Link] [Link] BanksServiceSectorCompositeIndicatorsignalmoderation. TheReserveBanksOrderBooks,InventoryandCapacityUtilisationSurveyshowscapacityutilisation [Link],newordersmoderatedinQ2of201213. IndustrialactivityhasremainedsubduedandSluggishexternaldemandcontinuestoinhibitimprovementin [Link],severewinterincertainpartshasendangered [Link],whichshouldbethekeydriveroftheupturn,continuestobe [Link],itwilltake sometimetoreversetheinvestmentslowdownandreinvigorategrowth. Accordingly,thebaselineprojectionofGDPgrowthfor201213isreviseddownfrom5.8%to5.5%
AggregateDemand Improvementininvestmentclimateisaprerequisiteforeconomicrecovery
Demandconditionsremainedtepid,withprivateconsumptioncontinuingtodecelerateandwithinvestment yettorecover. InvestmentintentionsinnewprojectsimprovedmarginallyinQ2of201213,butinvestmentisheldbackby [Link] stalledduetoissuesrelatingtoenvironmentalclearances,landacquisitionandfinancialclosures. SalesgrowthmoderatedfurtherinQ2of201213toitslowestlevelinthreeyears,butnetprofitgrowth improvedmarkedly.EarlyresultsforQ3of201213indicatecontinuationofthetrendofsluggishsales. Qualityoffiscaladjustmentremainsaconcern,[Link] workingtowardsachievingrevisedfiscaldeficittargetof5.3percentofGDPbyrestrictingbothplanand nonplanexpenditureduringthelastquarteroftheyear,evenassignificantshortfallintaxrevenueislikely. Increasedpublicinvestmenttocrowdinprivateinvestmentalongwithremovalofstructuralimpediments thatisslowingprivateinvestmentisneededtopulltheeconomyoutofthecurrentslowdown.
ExternalSector WideningofCADanditsfinancingremainsakeypolicychallenge
Wideningcurrentaccountdeficit(CAD)[Link] thelikelihoodthatCAD/GDPratiomayexceed4percentofGDPforthesecondsuccessiveyearin201213, prudenceisnecessarywhilestimulatingaggregatedemand. TheCAD/[Link] [Link]. ExportscontractedinDecemberfortheeighthmonthinsuccession,reflectingdepressedexternaldemand conditionsandstructuralbottlenecks.
EssaysforIIM.com200913
Page2
WAT/PIUpdates[Link]
Ontheotherhand,importsroseonthebackofhigheroilandgoldimports,consequentlywideningthe merchandisetradedeficitinQ3comparedtoitslevelayearago. Ontopofthelargetradedeficit,theslowdowninnetexportsofservicesandlargeroutflowsofinvestment incomepaymentsisexpectedtowidenthecurrentaccountdeficit(CAD)furtherinQ3,beyondthelevelof 5.4percentofGDPrecordedinQ2of201213. StrongcapitalflowshavefacilitatedfinancingofCAD,resultingonlyinmarginaldrawdownofreserves. WhileincreasedFIIdebtinvestmentlimitsmayenhanceinflows,theydonotprovideasolutiontoCAD financingonasustainablebasis. Sofar,[Link] andaccretionstononresidentdepositscompensatedforlowernetexternalcommercialborrowingsand foreigndirectinvestment(FDI)[Link],thesheersizeof theexternalfinancingrequirementimposedbythelargeCADhasbroughttobeardownwardpressureson therupeewhichdepreciatedinnominalandrealtermsbyJanuary2013relativetoitslevelinMarch2012. VariousmeasuresundertakenbytheGovernmentsincemidSeptember,includingliberalisationofFDIin retail,aviation,broadcastingandinsurance,defermentofgeneralantiavoidancerules(GAAR),reductionin withholdingtaxonoverseasborrowingsbydomesticcompaniesandsettingupoftheCabinetCommitteeon Investmenthavesignificantlyliftedmarketsentimentwhich,induecourse,shouldspurinvestment. Alongside,measuressuchasprogressivederegulationofadministeredfuelprices,withconcertedeffortsto [Link] policyactionscouldhelpengenderstablemacroeconomicconditionsandreturntheeconomytoitshigh [Link],improvecompetitivenessandmanagethesupply constraints,includingaugmentingenergyavailability,arecrucialforraisingthepotentialgrowthpathinthe mediumterm.
PriceSituation Headlineandcoreinflationmoderated,butsuppressedinflationposesrisks
HeadlineinflationmoderatedinQ3of201213withsignificantmoderationofcoreinflation,butCPI [Link] demandsideconsiderations. Headlinewholesalepriceindex(WPI)inflationeasedsignificantlyfrom8.1percentinSeptember2012 [Link],inflationonaccountofnonfoodmanufacturedproducts,which haveaweightof55percentintheWPI,fellsharplyinNovemberDecemberasinputpricepressures easedprimarilyonthebackofebbingmetal,nonmetallicmineralsandchemicalsgroupinflation. Foodinflation,ontheotherhand,showedacontrarianbehaviour,movingintodoubledigitsin [Link] [Link],withthefirmingupofpricesofedibleoilsandgrainmill products,theoverallmomentuminfoodinflationremainedfirm.
EssaysforIIM.com200913
Page3
WAT/PIUpdates[Link]
Inflationbasedonthenewcombined(ruralandurban)consumerpriceindex(CPI)(Base:2010=100) roseto10.6percentinDecember,[Link] groups,CPIinflationremainedunchangedat8.4percentduringQ3. [Link] [Link],increasesinstaffcostsremainedindoubledigits. Goingforward,risksremainfromsuppressedinflation,pressureonfoodpricesandhighinflation expectationsgettingentrenchedintothewagepricespiral.Theinflationpathfor201314couldface downwardrigidity.
DECISIONSANNOUNCED: Reducethepolicyreporateby25basispointsfrom8.0percentto7.75percent Consequenttothis,thereversereporate,determinedwithaspreadof100basispointsbelowthereporate, [Link],themarginalstandingfacility(MSF)rate,determinedwitha spreadof100basispointsabovethereporate,andalsotheBankRatestandadjustedto8.75percent. Decidedtoreducethecashreserveratio(CRR)ofscheduledbanksby25basispointsfrom4.25percentto 4.0percentoftheirnetdemandandtimeliabilities(NDTL).ThisreductionintheCRRwillinjectprimary liquidityofaroundRs.180billionintothebankingsystem.
ConsiderationsBehindthePolicyMove 1. First,bothheadlinewholesalepriceinflationanditscorecomponent,nonfoodmanufacturedproducts inflation,[Link] [Link], excesscapacityinsomesectors,thepossibilityofinternationalcommoditypricesstabilisingaswellas [Link],further moderationininflationgoingintothenextfiscalyearislikelytobemutedasthecorrectionofunderpricing [Link],thesettingof monetarypolicyhastoremainsensitivetotheseconflictingpressuresandattendantrisks. 2. Second,growthhasdeceleratedsignificantlybelowtrendthroughthelastfiscalyearandthroughthisyear sofar,andoveralleconomicactivityremainssubdued. a. Onthedemandside,investmentactivityhasbeenwaybelowdesiredlevelsandconsumption [Link] growth. b. Onthesupplyside,constraintsintheavailabilityofkeyrawmaterialsandintermediatesare becomingbinding. c. WhiletheseriesofpolicymeasuresannouncedbytheGovernmenthasboostedmarketsentiment, theinvestmentoutlookisstilllacklustre,especiallyintermsofdemandfornewprojects. 3. [Link] tightnesscouldpotentiallyhurtcreditflowtoproductivesectorsoftheeconomy. EssaysforIIM.com200913 Page4
WAT/PIUpdates[Link]
RiskFactors Macroeconomicmanagementgoingforwardissubjecttoanumberofrisksasindicatedbelow: i) Domestically,thewideningoftheCADtohistoricallyhighlevelsinthecontextofalargefiscaldeficitand [Link] riskyandvolatileflowsincreasestheeconomysvulnerabilitytosuddenshiftsinriskappetiteand liquiditypreference,[Link] deficitswillaccentuatetheCADrisk,furthercrowdoutprivateinvestmentandstuntgrowthimpulses. Globalrisksremainelevated,withthepotentialforspilloversontheIndianeconomythroughtrade, [Link],theriskofpoliticalinactiontomanagethedebtceilingor evenasuddenonsetoffiscalausteritycanleadtoturmoilinfinancialmarkets,followedbyadownturn [Link] ofcredibleandcomprehensivepolicyresponsesremainsacontingentglobalrisk,alongwithgeopolitical tensionsthatcanadverselyimpactsupplies/pricesofkeycommodities,[Link] forcescanpotentiallyincreaseglobalriskaversionwithimplicationsforfinancingoftheCAD. Inflationoverthelastthreeyearshasbeenaresultofdemandpressuresaswellassupplyconstraints. Withdemandpressuresnowontheebb,[Link] requiredevelopinganadequate,credibleandflexiblesupplyresponseinrespectofthosecommodities [Link] supplyresponse,inflationarypressuresmayreturnandpersistwithadverseimplicationsfor macroeconomicstability. [Link], however,dependonanumberoffactorssuchasbridgingtheinfrastructuregaps,especiallyinpower andtransport,hasteningapprovals,removingproceduralbottlenecks,andimprovinggovernance. Riskaversioninthebankingsystemstemmingfromconcernsrelatingtoassetqualityisconstraining [Link],banksshouldbediscerningin theirloandecisionsandensureadequatecreditflowtoproductivesectorsoftheeconomy.
ii)
iii)
iv)
v)
EssaysforIIM.com200913
Page5