Macroeconomic and Monetary Developments in 2009-10
-Released on April 19, 2010
Headline WPI inflation firmed up significantly during the fourth quarter of 2009-10.
The initial inflationary pressure was predominantly conditioned by rising food and fuel prices, reflecting the impact of a deficient monsoon on agricultural output and the increase in international crude prices. In the second half of the year, with persistent supply side pressures, inflation became increasingly generalised.
This is evident from the acceleration of inflation in non-food manufactured products from -0.4 per cent in November 2009 to 4.7 per cent in March 2010.
Inflation, as measured by consumer price indices (CPIs) also remained high, though there was some moderation in February 2010.
These inflationary conditions, coupled with the stronger momentum seen in the pace of economic recovery, created the compelling ground for altering the Reserve Bank’s policy focus to anchoring inflation expectations.
Risks to Growth
Apart from monsoon-related uncertainty, there are downside risks to growth:
First, private consumption demand needs to improve significantly to support the growth momentum.
Second, global recovery, despite gaining strength, is expected to remain fragile, which has implications for exports.
Third, the exit from fiscal stimulus and the growth-supportive monetary policy, unless calibrated carefully, could impact the growth process.
Finally, the domestic saving rate has exhibited some decline, led by significant decline in public sector savings. This has adverse implications for the potential growth of the economy.
Reserve Bank’s Survey of Professional Forecasters suggests (median) growth for 2010-11 at about 8.2 per cent.
Inflation can be expected to moderate over the next few months, from the peak levels seen in recent months. There are, however, upside risks to inflation:
First, international commodity prices, particularly oil, have started to increase again. In several commodities, the import option for India to contain domestic inflation is limited, because of higher international prices.
Second, the revival in private consumption demand and the bridging of the output-gap will add to inflationary pressures.
Finally, it is important to guard against the risk of hardening of inflation expectations conditioned by near double digit headline WPI inflation.
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