Second Quarter Review of the Monetary Policy for 2011-12
-Announced on the 25th October 2011
Part A. Monetary Policy
II. Outlook and Projections
40. Keeping in view the domestic demand-supply balance, the global trends in commodity prices and the likely demand scenario, the baseline projection for WPI inflation for March 2012 is kept unchanged at 7 per cent (Chart 2). Elevated inflationary pressures are expected to ease from December 2011, though uncertainties about sudden adverse developments remain.
41. Although inflation has remained persistently high over the past two years, it is important to note that during the 2000s, it averaged around 5.5 per cent, both in terms of WPI and CPI, down from its earlier trend rate of about 7.5 per cent. Given this record, the conduct of monetary policy will continue to condition and contain perception of inflation in the range of 4.0-4.5 per cent. This is in line with the medium-term objective of 3.0 per cent inflation consistent with India’s broader integration into the global economy.
42. The current trends in money supply (M3) and credit growth remain above the indicative trajectories of the Reserve Bank. Deposit growth has been much higher this year than that in the last year due to increase in interest rates, especially of term deposits. Credit growth showed some moderation for a time, but thereafter it accelerated again. It is expected that monetary aggregates will evolve along the projected trajectory indicated in the First Quarter Review of Monetary Policy. Accordingly, M3 growth projection for 2011-12 has been retained at 15.5 per cent and growth of non-food credit at 18 per cent.
As always, these numbers are indicative projections and not targets.
43. The indicative projections of growth and inflation for 2011-12 are subject to several risks as detailed below:
i) A major downside risk to growth emanates from the global macroeconomic environment. While growth in advanced economies is already weakening, there is a risk of sharp deterioration if a credible solution to the euro area debt and financial problems is not found, in which case it will impact domestic growth through trade, finance and confidence channels.
ii) Despite recent moderation, global commodity prices remain high. However, weakening of global recovery has the potential to lead to significant softening of crude prices, which will have favourable impact for both growth and inflation.
iii) The Government has announced increased market borrowings, which can potentially crowd out more productive private sector investment. The Government has indicated that this will not impact the budgeted fiscal deficit. However, should the fiscal deficit slip from the budgeted level, it will have implications for domestic inflation. The large fiscal deficit has been an important source of demand pressure. Clearly, the impact of tightening monetary policy has been diluted by the expansionary fiscal position, which is a sub-optimal outcome.
iv) Structural imbalances in protein-rich items such as egg, fish and meat will persist. In particular, production of pulses this year is expected to be lower than last year. Consequently, food inflation is likely to remain under pressure.
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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