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Full Text of 3rd Quarter Review of Monetary Policy 2012-13 click here

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Full Text - RBI's Third Quarter Review of Monetary Policy Statement 2012-13

II. Outlook and Projections

Global Outlook


24. While the improvement in global financial conditions is supportive of global growth prospects for 2013, the recovery is likely to be anaemic and is also fraught with significant downside risks. The outlook for AEs generally remains weak. Despite manufacturing stabilising in Q4 of 2012 and forward-looking indicators of services activity showing an uptick, growth in 2013 is most likely to be tepid in view of the persisting drag from high unemployment, continuing deleveraging, financial fragility, persisting sovereign risks and fiscal tightening, all feeding into one another through negative feedback loops. Breaking out of this downward spiral will depend on resolute structural reforms and credible fiscal consolidation. For EDEs, weakness in external demand is expected to be a major factor holding back resumption of strong growth in 2013. Taking stock of all this in its latest World Economic Outlook update (January 2013), the IMF revised its forecast of global growth for 2013 downwards to 3.5 per cent from 3.6 per cent projected in October 2012.


25. Inflation rates remain subdued in most AEs, reflecting large output gaps and downward pressure on wages. Although inflation receded in a majority of EDEs during 2012, it remained stubbornly high in South Asia, Latin America and the Caribbean. Elevated oil prices and country-specific supply-side constraints may continue to put upward pressure on inflation in EDEs through 2014. Given the subdued global demand, the IMF forecasts oil prices to somewhat soften in 2013. However, there are upside risks from geo-political factors and supply disruptions.

Domestic Outlook


26. The Reserve Bank’s projection of GDP growth for 2012-13 in the First Quarter Review (FQR) of July 2012 was 6.5 per cent. In the SQR of October, this was revised downwards to 5.8 per cent, signalling increasing global risks as well as accentuated domestic risks on account of halted investment demand, moderation in consumption spending and erosion in export performance. Since then, industrial activity has remained subdued. Sluggish external demand continues to inhibit improvement in services. While the coverage of rabi sowing has picked up, severe winter in certain parts has endangered crop prospects. New investment demand, which should be the key driver of the upturn, continues to be weak. While the series of policy initiatives by the Government has boosted market sentiment, it will take some time to reverse the investment slowdown and reinvigorate growth. Accordingly, the baseline projection of GDP growth for 2012-13 is revised down from 5.8 per cent given in the SQR to 5.5 per cent


27. The substantial easing of non-food manufactured products inflation over Q3 in an environment of slower growth and excess capacity in some sectors suggests that inflation has come off its peak. However, it is expected to be range-bound around current levels due to persisting food inflation, the pass-through of diesel price adjustments over the next several months and the possibility of adjustment in other administered prices. If international commodity prices, including of crude, move further downwards, they should cushion the phased increase in diesel prices, provided they are not offset by currency movements. A sustained reduction in inflation pressure is, however, contingent upon alleviation of supply constraints and progress on fiscal consolidation. This will also help mitigate the cost-push pressures stemming from the surge in wages. Keeping in view the expected moderation in non-food manufactured products inflation, domestic supply-demand balances and global trends in commodity prices, the baseline WPI inflation projection for March 2013 is revised downwards from 7.5 per cent set out in the SQR to 6.8 per cent

28. 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.

Monetary Aggregates

29. Money supply (M3) growth has been below its indicative trajectory for 2012-13 so far, while non-food credit growth has been around the projection. Keeping in view the seasonal pattern for the last quarter, M3 growth projection for 2012-13 has been scaled down to 13.0 per cent from 14.0 per cent while non-food credit growth projection is retained at 16.0 per cent. These numbers, as always, are indicative projections and not targets.

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