Macroeconomic and Monetary Developments : Third Quarter Review 2012-13
-Announced on 28th January 2013 by RBI
The Reserve Bank of India has released the Macroeconomic and Monetary Developments : Third Quarter Review 2012-13 . The document serves as a backdrop to the SThird Quarter Review of Monetary Policy Statement 2012-13 to be announced on January 29, 2013.
Widening of CAD and its financing remains a key policy challenge
Widening current account deficit (CAD) has emerged as a major constraint in easing monetary policy. With the likelihood that CAD/GDP ratio may exceed 4 per cent of GDP for the second successive year in 2012-13, prudence is necessary while stimulating aggregate demand.
The CAD/GDP ratio reached its highest ever peak of 5.4 per cent of GDP in Q2 of 2012-13. Early indications are that it may increase further in Q3 of 2012-13. CAD has widened mainly due to worsening trade deficit.
Weak external demand alongside structural bottlenecks has led to contraction in exports of India as also of other EMDEs. In addition, continuing large imports of oil and gold has resulted in deterioration in India’s trade balance.
Strong capital flows have facilitated financing of CAD, resulting only in marginal draw down of reserves. While increased FII debt investment limits may enhance inflows, they do not provide a solution to CAD financing on a sustainable basis.
Monetary and Liquidity Conditions
With moderating inflation, Reserve Bank takes measures to infuse liquidity
Since the start of 2012, the Reserve Bank has worked towards easing monetary and liquidity conditions in a calibrated manner without jeopardising moderating inflation. With consequent moderation in inflation, the Reserve Bank took measures to combat tight liquidity conditions.
Liquidity conditions tightened in Q3 of 2012-13 due to build up of government cash balances and strong currency demand. The Reserve Bank resumed outright open market operations (OMOs). In 2012-13 so far, it has infused liquidity of `1.3 trillion through outright OMOs.
Broad money growth remains below indicative trajectory. Deposit growth has decelerated, while credit expansion has been in line with the trajectory. Even as asset quality concerns have impacted credit expansion, the increased wedge between deposit and credit growth remains a concern.
Reforms and inflows improve market sentiments and revive the IPO market
Improved global liquidity and recent policy reforms have aided FII inflows, leading to a turnaround in equity markets and revival of the Initial Public Offering (IPO) market.
Rupee remained largely range-bound in Q3 of 2012-13. Money market remained stable despite liquidity deficit. G-sec yields softened markedly since December 2012 on expectations of no additional government borrowing and policy rate cut, as also resumption of OMOs and deferment of an auction.
The Reserve Bank’s House Price Index (HPI) increased by 3 per cent quarter-on-quarter in Q2 of 2012-13 alongside increase in transaction volumes.
Headline and core inflation moderated, but suppressed inflation poses risks
Headline inflation moderated in Q3 of 2012-13 with significant moderation of core inflation, but CPI inflation edged up to double digits. Core inflation pressures are unlikely to re-emerge quickly on demand-side considerations. Near-term inflation outlook indicates that the moderation may continue in Q4 of 2012-13.
Wage inflation remains a source of concern. Rural wage inflation declined marginally but remained high at 18 per cent. In organised manufacturing, increases in staff costs remained in double digits.
Going forward, risks remain from suppressed inflation, pressure on food prices and high inflation expectations getting entrenched into the wage price spiral. The inflation path for 2013-14 could face downward rigidity.
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