Second Quarter Review of the Monetary Policy for 2011-12
-Announced on the 25th October 2011
Part A. Monetary Policy
I. The State of the Economy
17. Y-o-Y headline WPI inflation has remained stubbornly high during the financial year so far, averaging 9.6 per cent. Inflation was driven by all the three major groups, viz., primary articles; fuel and power; and manufactured products. As indicated in the First Quarter Review, both the level and persistence of inflation remain a cause of concern. However, there is some comfort coming from de-seasonalised sequential quarterly WPI data which suggest that inflation momentum has turned down.
18. Y-o-Y primary food inflation was 9.2 per cent in September 2011 as compared with 9.6 per cent in August. The elevated level of primary food inflation was mainly on account of increase in prices of vegetables, milk and pulses.
19. Y-o-Y fuel-group inflation increased from 12.8 per cent in August 2011 to 14.1 per cent in September mainly due to the increase in petrol prices and upward revision in electricity prices.
20. Y-o-Y non-food manufactured products inflation was 7.6 per cent in September as compared with 7.7 per cent in August; it was 7.0 per cent in April. This should be seen in comparison with the average non-food manufactured product inflation of a little over 4.0 per cent during the last six years. The current high level reflects a combination of high commodity prices and persistent pricing power as evidenced from the early corporate results of Q2 of 2011-12.
21. Y-o-Y inflation as measured by the consumer price index (CPI) for industrial workers, which had moderated during April-July 2011, rose to 9.0 per cent in August reflecting increase in food prices. The new combined (rural and urban) CPI (Base: 2010=100) rose to 113.1 in September from 111.7 in August. Inflation based on other CPIs was in the range of 9.3 to 9.4 per cent during September.
22. Y-o-Y money supply (M3) growth moderated from 17.2 per cent at the beginning of the financial year to 16.2 per cent on October 7, 2011. This level, however, was still higher than the indicative projection of 15.5 per cent for 2011-12, essentially reflecting the growth in bank deposits as term deposit rates increased. In turn, this has resulted in moderation in currency growth.
23. Although non-food credit growth decelerated from 22.6 per cent on a y-o-y basis in April to 19.3 per cent on October 7, 2011, it was still running higher than the indicative projection of 18 per cent set out in the First Quarter Review of Monetary Policy 2011-12. Disaggregated data on a financial year basis (April-September) show that credit growth to industry decelerated to 7.5 per cent from 8.1 per cent in the previous year, with credit to infrastructure decelerating sharply. There was also deceleration in credit growth in services and personal loans. However, growth of housing loans accelerated.
24. The estimated total flow of financial resources from banks, non-banks and external sources to the commercial sector during the first half of 2011-12 was around `5,00,000 crore, up from Rs4,80,000 crore during the same period of last year. The deceleration in bank credit was more than offset by higher flows from non-bank and external sources, particularly foreign direct investment and external commercial borrowings, reflecting still buoyant demand for financial resources.
25. During the first half of 2011-12, the modal deposit rate of banks increased by 80 basis points (bps) to 7.45 per cent. The rise in deposit rates was relatively sharper for maturities up to one year across the banking system. During the same period, the modal Base Rate of banks increased by 125 bps to 10.75 per cent.
26. Liquidity conditions continued to remain in deficit during the current financial year (up to October 21), consistent with the anti-inflationary stance of monetary policy. The liquidity deficit in the system, as reflected by the daily borrowings under the liquidity adjustment facility (LAF) repos, averaged around Rs47,000 crore till October 21, 2011. The systemic deficit thus remained within one per cent of banks’ net demand and time liabilities (NDTL), the comfort zone assessed by the Reserve Bank.
27. The Central Government’s key deficit indicators widened during April-August 2011. This was due to both deceleration in tax revenues and increase in expenditure, particularly relating to fertiliser and petroleum subsidies. The fiscal deficit during April-August 2011 was 66.3 per cent of budget estimates as compared with 58.4 per cent in 2010-11, even after adjusting for higher than budgeted spectrum receipts.
28. The Central Government has announced an increase in the budgeted borrowing by about Rs53,000 crore to meet the shortfall in other financing items. Consequently, the revised gross (net) borrowings for the year work out to about Rs5,23,000 crore (Rs4,06,000 crore). The Central Government raised 61 per cent of gross (Rs3,20,000 crore) and 59 per cent of net market borrowings (Rs2,41,000 crore) up to October 14, 2011.
29. In the money market, the overnight interest rates have remained generally close to the repo rate during 2011-12 so far. The 10-year benchmark government security yield, which remained range-bound during the first half of 2011-12, increased by 38 basis points during October 2011 (to 8.82 per cent as on October 21), reflecting in part, increased government borrowings for the second half of the year.
30. Following a period of stability in Q1 of 2011-12, equity and forex markets came under some pressure in Q2 of 2011-12 reflecting the volatility in the global financial markets. Domestic equity prices declined in recent weeks due to significant outflows by foreign institutional investors (FIIs), driven largely by global risk aversion.
31. Between March and September 2011, the 6, 30 and 36-currency trade weighted real effective exchange rates (REER) depreciated by 6.3 per cent, 2.0per cent and 4.1 per cent, respectively, primarily reflecting the nominal depreciation of rupee against the US dollar by 8.7 per cent. The rupee depreciated further against the US dollar by 2.3 per cent between end-September and October 21, 2011. It is relevant to note in this context that the Reserve Bank’s exchange rate policy is not guided by a fixed or pre-announced target or band. The policy has been to retain the flexibility to intervene in the market to manage excessive volatility and disruptions to macroeconomic stability.
32. Notwithstanding slowing and uncertain global conditions, exports grew by 47 per cent during Q1 of 2011-12 reflecting diversification in products and destinations. During the same period, imports increased by 33 per cent largely reflecting higher oil prices. Consequently, the trade deficit widened to US$ 35.4 billion in Q1 of 2011-12 from US$ 32.3 billion in the corresponding period of last year. If the current trend persists, the current account deficit (CAD) as a percentage of GDP this year may be higher than it was last year.
>>> GO TO PAGE 1
Second Quarter Review of Monetary Policy 2011-2012... click here
Highlights of 1st Quarter Review of Monetary Policy 2011-2012... click here
Macroeconomic & Monetary developments: Second Quarter Review 2011-12... click here
RBI CREDIT AND MONETARY POLICIES (1999-2012)... click here