First Quarter Review of the Monetary Policy for 2011-12
-Announced on the 26th July 2011
II. Outlook and Projections
Domestic Outlook (Contd)
50. The current trends in money supply (M3) and credit growth remain above the indicative trajectory of the Reserve Bank. Keeping in view the evolving growth-inflation dynamics, the indicative projection of M3 growth for 2011-12 is revised downwards from 16.0 per cent, as set out in the May 3 Policy Statement, to 15.5 per cent. Non-food bank credit growth projection is also revised downwards from 19.0 per cent to 18.0 per cent.
51. The indicative projections of growth and inflation for 2011-12 are subject to several risks as detailed below.
i) Notwithstanding some moderation, global commodity prices, especially that of oil, continue to weigh on both domestic growth and inflation. The future path of crude oil prices is uncertain. Should the recovery in advanced economies pick up, there may be upward pressure on prices. On the other hand, should the recovery stall, the easy liquidity conditions will continue to prevail leading to continued speculative positions which may prevent prices from softening.
ii) The uncertain global macro-economic environment poses a challenge for the domestic economy from the perspective of financing the current account deficit. In this context, the composition of capital flows remains a concern. In recent months, some shift in composition of capital flows towards FDI has been observed. This trend needs to be reinforced through policy actions to improve the quality of financing of the current account deficit.
iii) There are risks to the food inflation outlook. First, although the monsoon has been close to normal so far, deficient rainfall in August coupled with higher MSP could result in an upward movement in cereals and pulses price inflation. Second, inadequate supply response could keep price inflation of protein-rich items such as egg, meat, fish, milk and pulses high.
iv) The Central Government budgeted a fiscal deficit of 4.6 per cent of GDP for 2011-12. Subsequent developments have made the achievement of this target much more of a challenge. On the expenditure side, the subsidy burden will, in all likelihood, overshoot the budgeted amount in 2011-12 significantly, despite the recent revision in petroleum product prices. On the revenue side, while the tax cuts announced in June 2011, as part of the upward price adjustment of petroleum products, will primarily help in bringing down the magnitude of under-recoveries of oil marketing companies (OMCs), the revenue loss to the Central Government from such tax cuts (about 0.3 per cent of GDP) will impact both the fiscal and revenue deficits. The large fiscal deficit has been a key source of demand pressures. Fiscal consolidation is, therefore, critical to managing inflation. While meeting quantitative targets, the Government also needs to focus on the quality of expenditure to sustain the fiscal consolidation process, which, in turn, will help contain aggregate demand and raise potential output.
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