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
7. Economic activity in advanced economies weakened further during Q3 of 2011 (July-September). Escalating concerns over medium-term sovereign debt dynamics in the euro area and, in particular, substantial potential losses to banks holding this debt have impacted global financial markets enormously. The adverse feedback loops among sluggish growth, weak sovereign balance sheets, large exposures of banks to sovereign debt and political compulsions coming in the way of a credible solution have created a crisis of confidence, which is a potential threat to regional and global financial stability.
8. High prices of crude oil and other commodities, persistently high unemployment and weak housing markets continued to impact consumer confidence and private consumption. Fiscal tightening, driven by medium-term sovereign debt concerns, also contributed to the loss in the growth momentum. This is reflected in the fall in the global manufacturing purchasing managers’ index (PMI) to 49.9 in September, its lowest level since June 2009.
9. The above factors also had a knock-on impact on major EMEs. According to the IMF, global growth decelerated from 4.3 per cent year-on-year (y-o-y) in Q1 of 2011 to 3.7 per cent in Q2, and further to an estimated 3.6 per cent in Q3, as growth in advanced economies fell from 2.2 per cent to 1.5 per cent and 1.3 per cent over the same period.
10. Significantly, the weaker global growth since Q2 has resulted in only a small correction in international commodity prices, particularly crude oil. Brent and Dubai Fateh prices (which comprise the Indian basket) have declined only modestly. The World Bank’s September 2011 indices of energy prices were higher by 32 per cent (y-o-y) and of non-energy by 17 per cent.
11. Reflecting the above trend, headline measures of inflation remained above the comfort zones/targets in both advanced economies and EMEs. In the case of EMEs, strong domestic demand pressures added to inflationary pressures. Amongst major economies, headline consumer price inflation (y-o-y) in September 2011 was 3.9 per cent in the US, 3.0 per cent in the euro area, 5.2 per cent in the UK, 6.1 per cent in China, 7.3 per cent in Brazil and 6.2 per cent in Turkey. In response to turbulent global conditions and domestic considerations, central banks in major EMEs have displayed a variety of responses, depending on their specific macroeconomic conditions.
12. GDP growth decelerated to 7.7 per cent in Q1 (April-June) of 2011-12 from 8.8 per cent a year ago, and 7.8 per cent in Q4 of 2010-11. From the supply side, the deceleration in growth in Q1 was mainly due to slower growth in mining, manufacturing, construction and ‘community, social and personal services’.
13. Rainfall during the south-west monsoon was one per cent above normal. The Reserve Bank’s production weighted rainfall was also one per cent above normal. The first advance estimates for the 2011-12 kharif season point to record production of rice, oilseeds and cotton. However, the output of pulses may decline due to a reduction in acreage.
14. Industrial growth, as measured by the index of industrial production (IIP), decelerated to 5.6 per cent during April-August 2011 from 8.7 per cent in the corresponding period of the previous year. This was mainly on account of slowdown in capital goods, intermediate goods and consumer durables. Growth of eight core infrastructure industries during April-August 2011 also slowed down to 5.3 per cent from 6.1 per cent in the corresponding period of last year.
15. According to the Reserve Bank’s order books, inventories and capacity utilisation survey (OBICUS), capacity utilisation moderated during Q1 of 2011-12 compared with the previous quarter. Business sentiment, as indicated by the business expectations index of the Reserve Bank’s industrial outlook survey, declined in Q2 of 2011-12 and showed further moderation for the following quarter. PMI indices for both manufacturing and services declined during September 2011.
16. Based on an analysis of a sample of 2,426 non-financial companies, margins of corporates in Q1 of 2011-12 moderated across sectors compared with their levels in Q4 of 2010-11. A classification of companies into the use-based segments of the IIP indicated that the intermediate goods segment registered the maximum decline in margins, reflecting the impact of commodity prices. Other segments saw lower margin compression, suggesting that pricing power was reducing, albeit gradually. Early results for Q2 of 2011-12 (of 161 companies analysed till October 20, 2011) suggest that both sales growth and margins moderated marginally.
>>> GO TO PAGE 2
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