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Second Quarter Review of Monetary Policy click here

Second Quarter Review of Monetary Policy 2010-11
-Announced on the 2nd November 2010

II. Outlook and Projections

Domestic Outlook

Monetary Aggregates

37. While the year-on-year money supply (M3) growth at 15.2 per cent in early October 2010 was below the indicative projection of 17.0 per cent, non-food credit growth at 20.1 per cent was close to the indicative projection of 20.0 per cent. There are already some signs of pick-up in deposit and credit growth. It is expected that monetary aggregates will evolve along the projected trajectory indicated in the April policy statement. Accordingly, the M3 and non-food credit growth projections for 2010-11 have been retained at 17 per cent and 20 per cent, respectively. As always, these numbers are indicative projections and not targets.

Risk Factors

38. The above macroeconomic and monetary projections are subject to a number of upside and downside risks. First, the main downside risk to growth emanates from the prospects of a prolonged slow and halting recovery process in advanced economies as evidenced by the recent indicators of global economic activity. Concerns are being expressed that the ongoing fiscal consolidation in the absence of revival of private demand might weigh on the recovery process. Should the global recovery falter, the growth performance of EMEs, including India which has remained robust so far, is likely to be adversely affected. While India’s exports as a percentage of GDP are relatively low compared to other major EMEs, a widespread slowdown in global trade cannot but have an impact on the manufacturing and service sectors.

39. Second, although overall inflation and non-food manufactured products inflation have moderated in the recent period, inflationary pressures remain which may accentuate for several reasons. Despite the fragile global recovery, international commodity prices have risen in recent months due to strong demand from EMEs and some financialisation of commodities due to large surplus global liquidity. Should there be further quantitative easing by advanced economies, it will pose a further risk to global commodity prices. Persistently high domestic food inflation points to the presence of some structural component, which will continue to weigh on the overall inflation. With the domestic capacity utilisation slowly approaching the pre-crisis peak in many industries, demand side pressures may accentuate. Going forward, therefore, the risks to inflation are largely on the upside.

40. Third, given the weak recovery in advanced economies, Japan has already resorted to further monetary easing through unsterilised intervention in the forex market. Some other advanced economies are in the process of resorting to another round of quantitative easing. Given that growth prospects in EMEs, including India, are much better, the surplus liquidity generated by central banks in advanced economies could flow into the EMEs. In fact, the expectation of further quantitative easing in advanced economies has already resulted in large capital inflows to EMEs. As a result, exchange rates have been appreciating and asset prices have been rising in EMEs. Excess global liquidity combined with the significant growth differential, interest rate differential and higher financial market returns in India vis-à-vis the advanced economies might lead to intensification of capital flows to India. Although India needs capital flows to finance its widening current account deficit, large capital flows beyond the absorptive capacity of the economy could pose a major challenge for exchange rate and monetary management.

41. Fourth, India’s current account deficit has widened in the recent period due to slowing down of exports and invisibles on the one hand and rising imports on the back of strong rebound of the domestic economy on the other. Although the current account deficit has been easily financed by the rising capital flows so far, the widening of the current account deficit raises concerns given the uncertainty associated with international capital flows.

42. Fifth, asset prices in India, as in many other EMEs, have risen sharply. The equity market is close to its previous all-time peak level. Residential property prices in metropolitan cities have gone beyond the pre-crisis peak level. Gold prices are ruling at an all-time high level. Although the income levels of households and earnings of corporates in India have continued to rise, a sharp rise in asset prices in such a short time causes concern.


Second Quarter Review of Monetary Policy 2010-11 ... click here

Highlights of 2nd Quarter Review of Monetary Policy 2010-2011... click here

RBI CREDIT AND MONETARY POLICIES (1999-2011)... click here

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