Macroeconomic and Monetary Developments in the Third Quarter of 2010-11
-Released on January 24, 2011
The Reserve Bank of India released its Macroeconomic and Monetary Developments: Third Quarter Review 2010-11 document to serve as a background to the Third Quarter Review of Monetary Policy 2010-11 to be announced on January 25, 2011.
Highlights of Macroeconomic and Monetary Developments in the Third Quarter of 2010-11 :
Robust and broad-based growth is expected to coexist with elevated inflation in the near-term.
While downside risks to growth have receded, upside risks to inflation have increased.
Since a lower inflation regime is essential for sustainable high growth, containing inflation becomes the dominant policy objective in the current environment.
Global Economic Conditions
While the outlook for recovery in advanced economies has improved, concerns persist over the durability of the momentum.
Global economic activity in the second half of 2010 turned out to be stronger than earlier expectations. However, the uneven pace of growth across regions and uncertainty about the durability of recovery in the advanced economies persist.
Emerging Market Economies (EMEs) face the risk of inflation from strong growth and hardening of commodity prices.
A number of EMEs resorted to soft capital controls and foreign exchange market intervention to limit the adverse impact of excess capital inflows on their economies.
Strong growth puts the economy back on its earlier high growth trajectory but sectoral imbalances pose risks to inflation.
The robust GDP growth in the first half of 2010-11 suggests that the economy has returned to its earlier high growth path.
Satisfactory kharif production and higher rabi sowing point to stronger contribution of the agriculture sector to overall GDP growth in 2010-11.
Industrial production has exhibited near double digit growth but the significant volatility adds uncertainty to the outlook.
Lead indicators of services sector show sustained buoyancy.
In certain sectors, particularly non-cereal food items, however, the supply response to market signals in the form of higher prices has been weak, thereby exerting upward pressures on inflation.
Private consumption expenditure and gross capital formation emerge as the key growth drivers.
Growth in private consumption expenditure, after remaining subdued over several quarters, exhibited significant acceleration in the first half of 2010-11.
As per trends in the growth of gross fixed capital formation, the strong recovery in investment demand that had started in the last quarter of the previous year, has consolidated and remained strong.
Fiscal trends during the year to date suggest that the fiscal deficit could remain within the budgeted level, but high growth in capital expenditure would add to the overall growth momentum from private demand.
Higher current account deficit fully buffered by higher capital inflows, but sustainability concerns could stem from the composition of capital flows.
As expected, the current account deficit widened significantly in the second quarter of the year.
Even as exports expanded faster than imports, the trade deficit widened. From the current account perspective, the cushion to a widening trade deficit from net invisibles declined.
Higher net capital inflows did not pose any immediate challenge, unlike in many other EMEs, because of the widening deficit in the current account.
The shift in the composition of capital flows, particularly the sharp jump in portfolio inflows and significant decline in net FDI inflows, however, raise questions about the sustainability of the external sector in the medium-term.
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