First Quarter Review of the Monetary Policy for 2010-11
-Announced on the 27th July 2010
II. Outlook and Projections
25. In its July Update of the World Economic Outlook, the IMF revised upwards its growth projection for the global economy for 2010 to 4.6 per cent from 4.2 per cent in April 2010 on the strength of robust Q1 growth. However, as indicated earlier, recent data and analysis suggest slowing down of the global growth momentum and the expectation is that global growth in the second half of 2010 will be lower than that in the first half.
26. Just like growth, inflation around the world too has been multi-speed. The inflation scenario in advanced economies has been shaped by high unemployment, low capacity utilisation and renewed uncertainties about the financial sector. Headline inflation in advanced economies, which inched up during January-March 2010, softened thereafter. Inflation expectations too remain well anchored; indeed, concerns about deflation have re-emerged in some of the advanced economies. In contrast, the relatively rapid recovery in EMEs has also been accompanied by faster growth in prices.
27. Significantly, with increasing uncertainty about the pace of global recovery, global energy and commodity prices have softened. This trend has been reinforced by the slowdown of the Chinese economy. Consequently, global inflationary pressures are expected to be subdued over the next few months.
28. The growth prospects of the Indian economy have improved since April 2010. Although cumulative rainfall so far has been 14 per cent below the LPA, the monsoon has been better than during last year. Should overall monsoon performance turn out to be as projected (102 per cent of LPA), there will be a pick-up in rural demand. This should give further momentum to the performance of the industrial sector, which has been growing firmly since October 2009.
29. Growth in exports, which turned positive in October 2009, picked up further in subsequent months despite concerns over the external demand outlook due to the sovereign debt problem in euro area. Service sector activities have also shown buoyancy since the latter half of 2009-10. The leading indicators of various services have shown significant improvements.
30. The strength of the recovery is also reflected in the sales and profitability growth of the corporate sector. Besides replenishment of inventories, investment intentions are being translated into action across sectors, particularly in power, telecom and metals. Increase in resource mobilisation by the commercial sector from both banks and non-banks and the widening of the current account deficit also suggest strong underlying growth momentum.
31. Domestic drivers of growth are robust. However, if the global recovery slows down, it will affect all EMEs, including India, through the usual exports, financing and confidence channels.
32. Taking into account the progress of monsoon so far and the prevailing global macroeconomic scenario, for policy purposes, the baseline projection of real GDP growth for 2010-11 is revised to 8.5 per cent, up from 8.0 per cent with an upside bias as indicated in April 2010 policy statement (Chart 1). This upward revision is primarily based on better industrial production and its favourable impact on the services sector, giving due consideration to the global scenario.
33. The Reserve Bank’s growth projection for 2010-11 is consistent with the median growth forecast from its professional forecasters’ survey and other agencies. It must be noted that the IMF growth forecast for India at 9.4 per cent for calendar 2010 is based on GDP at market prices, whereas other projections, including that of the Reserve Bank, are based on GDP at factor cost. Adjusting for this, the IMF projections are in line with others.
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