Macroeconomic and Monetary Developments in 2012-13
-Announced on 2nd May 2013 by RBI
CAD risks stay though fall in global commodity prices bring temporary respite
Modest pick-up in exports in Q4 of 2012-13 and some deceleration in imports are likely to help moderate current account deficit (CAD) in Q4 of 2012-13 after a record high of 6.7 per cent of GDP in Q3. Despite this, the CAD/GDP ratio for the year 2012-13 is expected to be around 5.0 per cent, twice the sustainable level.
High CAD in Q3 of 2012-13 was adequately financed by capital inflows, without any reserves depletion. CAD in 2013-14 is likely to benefit from moderation in global commodity prices. Yet, its sustainability continues to face risk from event shocks that may cause a sudden stop or reversal of capital inflows.
External vulnerability indicators worsened further in Q3 of 2012-13. India's external debt rose, reflecting continued dependence on ECBs and short-term borrowings to meet the widening CAD. Short-term debt on a residual maturity basis increased to 44 per cent of total debt and 56 per cent of the foreign exchange reserves by end-December 2012.
Monetary and Liquidity Conditions
Monetary conditions may evolve with macroeconomic developments and shifting growth-inflation dynamic
Using the limited monetary space, the Reserve Bank eased monetary policy during 2012-13 in a calibrated manner by cumulatively reducing policy rates by 100 basis points and injecting Rs 1.5 trillion of primary liquidity through outright open market operations. Besides, it injected Rs 1.3 trillion of primary liquidity through reductions in cash reserve ratio since January 2012.
During 2012-13, broad money growth remained on the indicative trajectory and reserve money adjusted for CRR changes grew at a reasonable pace. However, non-food credit growth remained below the indicative trajectory, reflecting growth slowdown and risk aversion among banks from deteriorating asset quality.
Strong FII flows augured well for Indian rupee and equity markets
Strong FII inflows, especially in H2 of 2012-13 augured well for the Indian equity markets and the rupee. Money markets remained orderly, despite year-end liquidity pressures. G-sec yields softened during Q4 of 2012-13, although with some increase at the year-end.
Primary markets remained subdued during 2012-13, though resource mobilisation through mutual funds and Qualified Institutional Placements gathered some momentum during the year.
The Reserve Bank's House Price Index increased 26 per cent y-o-y during Q3 of 2012-13, with annual increase hovering around 20 per cent for the past eight quarters. Transaction volumes registered a growth of 14 per cent during Q3.
Inflation risks remain despite moderation in headline inflation
Headline inflation and demand-side pressures have moderated, but inflation risks remain reflected in double-digit consumer price inflation, food supply constraints and suppressed inflation in energy segment, including diesel, coal and electricity.
Persistent pressures from wages remain a major risk to inflation moderation. Although the pace of increase in rural wages moderated a bit, it remains high.
Divergence between WPI and CPI inflation has widened on account of higher food inflation and other factors such as increase in housing rents and transportation costs.
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