Press Statement by Dr. D. Subbarao, Governor- Monetary Policy Statement for 2011-12 (17th April 2012)
18. Turning to the domestic macroeconomic situation, economic growth decelerated last year, dropping from 7.7 per cent in the first quarter to 6.9 per cent in the second quarter and further down to 6.1 per cent in the third quarter. This was mainly due to deceleration in industrial growth. Growth in the services sector held up relatively well. On the demand side, gross fixed capital formation contracted both in the second and third quarters of last year.
19. The Central Statistics Office (CSO) put out an advance estimate of GDP growth for last year of 6.9 per cent. More recent data on industrial production suggest that activity may have expanded at a slower pace last year.
20. Looking ahead, the overall growth outlook for the current year looks a little better than it was last year. Accordingly, the Reserve Bank’s baseline projection of GDP growth for the current year is 7.3 per cent.
21. Moving on to inflation, headline WPI inflation, which remained above 9 per cent during April-November 2011, moderated to 6.9 per cent by end-March 2012. This moderation was consistent with the Reserve Bank’s indicative projection of 7 per cent.
22. Food articles inflation continues to be high. Significantly. inflation in protein items is in double digits, reflecting persistent structural demand-supply imbalances in protein foods.
23. Fuel inflation, on the other hand, moderated from over 15 per cent in November-December 2011 to 10.4 per cent in March 2012 even as global crude oil prices rose sharply. This reflects the absence of a commensurate pass-through to domestic consumers.
24. Non-food manufactured products inflation decelerated significantly from 8.4 per cent in November 2011 to 4.7 per cent in March 2012, on the back of a slowdown in domestic demand and softening of global non-oil commodity prices.
25. Even as WPI inflation has softened, inflation as measured by the new series of consumer price index (CPI) suggests that price pressures are still high at the retail level.
26. Looking ahead, based on an assessment of the domestic demand-supply balance, global trends in commodity prices and the likely demand scenario, the Reserve Bank’s projection of inflation for March 2013 is 6.5 per cent.
Monetary and Liquidity Conditions
27. Let me now move on to monetary and liquidity conditions. Consistent with growth and inflation projections, M3 growth for 2012-13 is projected at 15 per cent. Keeping in view the need to balance the resource requirements of the private sector and the public sector, growth in non-food credit of scheduled commercial banks (SCBs) is projected at 17 per cent.
28. As I said earlier, liquidity management remained a major challenge for the Reserve Bank during last year. Beginning November 2011, the liquidity deficit went much beyond the comfort level of the Reserve Bank. In order to redress this, we took steps to inject primary liquidity of a more durable nature. We injected liquidity of around `1.3 trillion through open market operations and `0.8 trillion through reduction in the cash reserve ratio (CRR) by 125 basis points. As a result of these measures and the easing of government’s cash balances, the net borrowing under the LAF, which peaked at `2 trillion at end-March 2012, declined to `0.7 trillion on April 13, 2012.
29. Finally, let me highlight the risks to our indicative projections of growth and inflation for 2012-13:
First, a major risk to our growth and inflation projections stems from the outlook for global commodity prices, especially of crude oil. Although upside risks to oil prices from the demand side are limited, geo-political tensions are a concern. Any disruption in supplies is likely to lead to further increase in crude oil prices.
The second risk emanates from the fiscal situation. Even though the Budget has proposed a reduction in the fiscal deficit in the current year, there are several upside risks. Any slippage in the fiscal deficit will have implications for inflation.
Third, the large Government borrowing budgeted for 2012-13 has the potential to crowd out credit to the private sector. If that happens, the supply response required to accelerate growth could be inhibited.
Fourth, the financing of the current account deficit will continue to pose a major challenge.
And finally structural imbalances in protein-rich foods persist, and consequently, food inflation is likely to remain under pressure.
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