Full Text - RBI's Third Quarter Review of Monetary Policy Statement 2012-13
I. The State of the Economy
6. Signs of stabilisation in global economic activity have been in evidence in recent months, led by stronger than expected growth in the US in Q3, acceleration in the pace of activity in China and a pick-up in industrial production in EDEs in Q4. Activity in the euro area continues to be in a contraction mode, though financial market confidence has improved. Japan has embarked on a fresh fiscal stimulus following contraction in Q3. In the UK, a modest GDP growth in Q3 was followed by a decline in Q4. The HSBC Emerging Market Index rose in Q4. The global composite purchasing managers’ index (PMI) also rose marginally in December.
7. According to the IMF, consumer price inflation has eased in both advanced economies (AEs) and EDEs in 2012. However, risks to the inflation outlook from commodity price pressures persist.
8. Year-on-year (y-o-y) real GDP growth slowed from 5.5 per cent in Q1 of 2012-13 to 5.3 per cent in Q2. The decline in the GDP growth rate became broad based, with consumption demand also slowing alongside stalling investment and declining exports. On the supply side, there are indications of weakening resilience of services to sluggish global growth.
9. Looking ahead, there are some tentative signs of a reversal in momentum. While industrial production slowed to a y-o-y increase of 1.0 per cent in April-November 2012, the seasonally adjusted three-month moving average of the index of industrial production (IIP) points to a pick-up. The manufacturing PMI rose in December on the back of higher order book volumes and new export orders. The services purchasing managers’ index (PMI) also rose in December on expectations of a revival of demand. The Reserve Bank’s industrial outlook survey indicates positive business sentiment in Q3 and Q4. Coverage under rabi sowing has been broadly the same as in the corresponding period of last year.
10. Headline wholesale price index (WPI) inflation eased significantly from 8.1 per cent in September 2012 to 7.2 per cent by December. Notably, inflation on account of non-food manufactured products, which have a weight of 55 per cent in the WPI, fell sharply in November-December as input price pressures eased primarily on the back of ebbing metal, non-metallic minerals and chemicals group inflation. The seasonally adjusted three-month moving average annualised inflation also suggests a moderation in headline as well as non-food manufactured products inflation. With the industrial outlook survey also pointing to softening of the rate of increase of output prices, the pricing power of corporates seems to have weakened. Fuel group inflation moderated in December, mainly reflecting the tempering of inflation of non-administered petroleum products as well as the range-bound exchange rate of the rupee.
11. Food inflation, on the other hand, showed a contrarian behaviour, moving into double digits in December. Significant price pressures emanated from cereals. Prices of pulses and other protein-based food items remained elevated. Furthermore, with the firming up of prices of edible oils and grain mill products, the overall momentum in food inflation remained firm.
12. Inflation based on the new combined (rural and urban) consumer price index (CPI) (Base: 2010=100) rose to 10.6 per cent in December, largely reflecting the surge in food inflation. Excluding food and fuel groups, CPI inflation remained unchanged at 8.4 per cent during Q3.
13. According to the latest Reserve Bank’s urban households’ survey, inflation expectations for Q4 edged up marginally. Wage inflation in rural areas remained high, notwithstanding some recent moderation; as these wage increases have not been accompanied by improvement in productivity, they have imparted inflationary pressures. House price inflation, as measured by the Reserve Bank’s quarterly house price index, also remains elevated on a y-o-y basis.
14. Analysis of the early results of corporate performance in Q3 indicates that both sales and expenditure growth moderated while profit margins remained broadly unchanged.
15. Y-o-y money supply (M3) growth fell to 12.9 per cent by mid-January and remained below the indicative trajectory of 14.0 per cent. This essentially reflected the deceleration of growth in aggregate deposits and moderation in economic activity.
16. Y-o-y non-food credit growth, at 16.2 per cent by mid-January, was around the indicative trajectory. However, bank credit to industry showed a significant deceleration while credit to agriculture registered an increase.
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