First Quarter Review of the Monetary Policy for 2011-12
-Announced on the 26th July 2011
II. Outlook and Projections
34. Taking into account the loss of momentum of recovery during Q2 of 2011, the IMF, in its June, 2011 Update of World Economic Outlook (WEO), revised downwards its estimates for global growth in 2011 to 4.3 per cent from its April 2011 estimate of 4.4 per cent. More importantly, according to the IMF, downside risks to global growth have increased on account of continuing sluggishness in major advanced economies due to the weak labour and housing markets, and lingering sovereign debt concerns.
35. Globally, while growth is set to decelerate, inflation is expected to edge up in 2011 reflecting higher commodity prices and strong demand in EMEs. Although prices of cotton, rubber and metals have softened in the recent period, crude oil prices continue to be volatile and the outlook on this front remains uncertain. The IMF’s projection is that consumer price inflation is likely to increase from 1.6 per cent in 2010 to 2.6 per cent in 2011 in advanced economies, and from 6.1 per cent to 6.9 per cent in emerging and developing economies.
36. The May 3 Policy Statement projected baseline real GDP growth for 2011-12 at around 8.0 per cent. This estimate, made for policy purposes, was based on the assumption of a normal monsoon and crude oil prices averaging US$ 110 a barrel. Subsequent information suggests that this projection remains valid. The baseline scenario envisages some moderation in growth partly as a result of the monetary stance, but this is consistent with the objective of controlling inflation. However, the extent of moderation will be limited by the overall buoyancy in consumption, in part an outcome of overall increases in real wages. Exports performance, if persists, will also help contain the growth moderation. As regards the monsoon, its performance till the third week of July 2011 was close to normal, which bodes well for overall production. However, its spatial distribution indicates possible pressure on yields of coarse grains, pulses, oilseeds and cotton. A firmer assessment of agricultural performance will be made in the mid-quarter review to be released in September 2011.
37. Against this backdrop, the baseline projection of real GDP growth is retained at 8.0 per cent, as set out in the May 3 Policy Statement.
38. It is important to recognise that in the absence of appropriate actions for addressing supply bottlenecks, especially in food and infrastructure, questions about the ability of the economy to sustain the current growth rate without significant inflationary pressures come to the fore. The economy's ability to grow rapidly for any length of time without provoking inflation is dependent on implementing policies, with corresponding resource allocations, which will allow the supply of various products and services to keep pace with demand.
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