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Third Quarter Review of Monetary Policy 2011-12 click here

Third Quarter Review of Monetary Policy 2011-12
-Announced on the 24th January 2012

II. Outlook and Projections

Global Outlook


33. Global growth prospects for 2012 have deteriorated in an environment of increasing concerns over the sovereign debt crisis in the euro area amidst limited monetary and fiscal policy space. Given the weak growth prospects in advanced economies and past monetary tightening undertaken by EDEs to contain inflation, growth in the EDEs has also been moderating. Accordingly, global growth during 2012 is expected to be lower than the International Monetary Fund’s September 2011 projection of 4.0 per cent.


34. Although non-oil commodity prices showed some correction in 2011, crude oil prices have remained firm. Supply limitations and continued ultra accommodative monetary policies in major advanced economies pose upside risks to commodity prices in 2012. Currency depreciation in EDEs witnessed in the second half of 2011 and the lagged pass-through to domestic prices could also add to inflationary pressures in EDEs.

Domestic Outlook


35. In the SQR of October 2011, the Reserve Bank projected GDP growth of 7.6 per cent for 2011-12, though with significant downside risks. In the MQR of December 2011, the Reserve Bank indicated that some of these risks were indeed materialising such as increase in global uncertainty, weak industrial growth, slowdown in investment activity and deceleration in the resource flow to the commercial sector. Consequently, while agricultural prospects look buoyant, industrial production has decelerated. The slowdown in industrial production will also impact service sector growth. Further, weaker global growth will also have an adverse impact. Accordingly, the baseline projection of GDP growth for 2011-12 is revised downwards from 7.6 per cent to 7.0 per cent

36. Looking ahead to 2012-13, while a formal projection will be made in the Annual Policy Statement in April, the Reserve Bank’s baseline scenario is that the economy will exhibit a modest recovery, with growth being slightly faster than that during the current year.

37. It must be emphasised that investment activity has slowed down significantly. As indicated above, while global factors are contributing, domestic conditions are also responsible and a change in the investment climate is contingent on these adverse conditions being addressed by policy actions. Without this, a continuing decline in investment will push the economy’s trend rate of growth down, further aggravating inflationary pressures and threatening external and internal stability.


38. Food inflation has moderated more than anticipated because of a sharp drop in vegetable prices. This benefit has, however, been offset to a large extent by the lower than expected moderation in non-food manufactured products inflation. Fuel inflation remains well above double digits. Keeping in view the expected moderation in non-food manufactured products inflation, domestic supply factors and global trends in commodity prices, the baseline projection for WPI inflation is retained at 7 per cent as set out in the SQR

39. A significant downgrade in the growth projection would normally have been accompanied by a downward revision in the inflation projection. However, in the current circumstances, two factors have prevented this from happening. First, rupee depreciation has been feeding into core inflation, delaying the adjustment of inflation to slower growth. Second, very importantly, suppressed inflation in petroleum product and coal prices remains quite significant. While a rationalisation of prices is welcome for a variety of well known reasons, it will impact observed inflation in the short-term. This projection is based on the likelihood of some adjustments being made in these prices.

40. Looking ahead to 2012-13, while a formal projection will be made in the Annual Policy Statement in April, the Reserve Bank’s baseline scenario is that headline inflation may show some moderation, though remaining vulnerable to a variety of upside risks, indicated later in this Review.

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.


Macroeconomic and Monetary Developments: Third Quarter Review 2011-12 ...Click Here
Highlights of Third Quarter Review of Monetary Policy 2010-11....Click Here

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