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Third Quarter Review of Monetary Policy 2011-12 click here

Highlights - Third Quarter Review of Monetary Policy 2011-12 - Press Statement by Dr. D. Subbarao, Governor

Global and Domestic Developments

15. Our policy decision has been based on a detailed assessment of both the global and domestic macroeconomic developments. Let me begin with the global economy.

Global Economy

16. Since the Reserve Bank’s October Review, there have been significant changes in the global scenario. On the one hand, concerns over the sustainability of sovereign debt problem in the euro area have intensified. On the other, there are modest signs of improvement in the US. In the emerging and developing economies (EDEs), growth has been moderating, reflecting the sluggishness in the advanced economies and the impact of earlier monetary tightening.

17. Overall, notwithstanding the signs of recovery in the US, global growth prospects have weakened since the October Review. In September last year, IMF projected that global growth during 2012 would be 4 per cent. We now expect it to be lower.

Indian Economy

18. Moving on to the domestic economy, real GDP growth moderated from 7.7 per cent in the first quarter of 2011-12 to 6.9 per cent in the second quarter. This was mainly due to deceleration in industrial growth, while the services sector held up relatively well. GDP growth in the first half of 2011-12 slowed to 7.3 per cent, down from 8.6 per cent in the first half of last year.

19. On the demand side, the contraction in fixed capital formation in the second quarter was the main factor behind the slowdown in growth. This pattern, should it persist, will hurt medium-term growth prospects, further aggravate inflationary pressures, and threaten external and internal stability.

20. The global environment is only partly responsible for the weak industrial performance and sluggish investment activity; several domestic factors – the unhealthy fiscal situation, high interest rates and policy and administrative uncertainty – are also playing a role.

21. In its October 2011 Review, the Reserve Bank projected GDP growth of 7.6 per cent for 2011-12, though with significant downside risks. These downside risks have since materialised. Accordingly, the baseline projection of GDP growth for this year is revised downwards from 7.6 per cent to 7.0 per cent.

22. Looking ahead to next year, while we will put out a formal projection in our Annual Policy Statement in April, at this time, the Reserve Bank’s baseline scenario is that the economy will exhibit a modest recovery next year, with growth being slightly higher than during this year.


23. Let me now turn to inflation. Inflation is beginning to moderate as projected despite the significant depreciation of the rupee. Headline WPI inflation, which averaged 9.7 per cent (y-o-y) during April-October 2011, moderated to 9.1 per cent in November and further to 7.5 per cent in December.

24. The higher than expected deceleration in food inflation has provided some relief. In particular, food articles inflation has come down sharply from 8.5 per cent in November to 0.7 per cent in December. The prices of vegetables have had a big role in this sharp decline. If we exclude vegetables, the decline in food articles inflation is modest - from 8.0 per cent in November to only 7.1 per cent in December. We should also note that inflation in protein items – ‘eggs, fish and meat’, milk and pulses – remains high, evidencing the structural component of food inflation.

25. Non-food manufactured products inflation continues to remain elevated and well above the comfort zone. While indicators of pricing power suggest that the moderating trend will continue, upside risks remain significant. The momentum indicator of non-food manufactured products inflation is yet to show a discernible downward trend. Accordingly, while the Reserve Bank’s policy stance has to become more sensitive to growth risks, it also needs to guard against persistent inflation risks.

26. 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 for March 2012 is retained at 7 per cent as set out in our October Review.

27. We have revised our estimate for growth downwards, but have not changed our inflation estimate. This runs counter to the expectation that a significant downgrade in the growth projection should lead to a downward revision in the inflation projection. Why has that not happened? That has not happened for two reasons. First, the rupee depreciation has been feeding into core inflation, delaying the adjustment of inflation to slower growth. Second, and very importantly, suppressed inflation in petroleum product and coal prices remains quite significant. Rationalisation of these prices is, of course, welcome for a variety of well-known reasons, but it will impact observed inflation in the short term. Our projection of inflation, accordingly, is based on the likelihood of some adjustments being made in these prices.

28. What will be the inflation scenario in 2012-13? We will make a formal projection in our Annual Policy Statement in April. At this time, the Reserve Bank’s baseline scenario for next year is that headline inflation may show some moderation, though remaining vulnerable to a variety of upside risks, to which I will revert shortly.


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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