Macroeconomic and Monetary Developments in the Second Quarter of 2010-11
-Released on November 01, 2010
The Reserve Bank of India on November 01, 2010 released the document Macroeconomic and Monetary Developments in the Second Quarter of 2010-11. The document serves as a background to the Second Quarter Review of Monetary Policy 2010-11 to be announced on November 02, 2010.
Highlights of Macroeconomic and Monetary Developments in the Second Quarter of 2010-11 :
The uncertain global outlook, and the dominance of supply rigidities in certain sectors that impart rigidity to the inflation path, pose greater challenge for monetary policy in its objective of anchoring inflationary expectations without hurting growth.
Global Economic Conditions
The momentum of global recovery, which exceeded expectations in the first half of 2010, has slowed down in the last few months. According to IMF projections, the temporary slowdown in the pace of global growth in the second half of 2010 could extend up to the first half of 2011.
In advanced economies, the weakening of recovery has raised concerns about both unemployment and deflation. With capacity for fiscal stimulus already stretched and given the concerns about sovereign debt, further quantitative easing seems the preferred option to address the weakness in growth.
The persisting output gap could tempt advanced economies to resort to protectionist measures along with preference for undervalued exchange rates, and that could pose downside risks to global recovery.
EMEs, which had led the global recovery, continue to exhibit strong growth momentum. Notwithstanding some likely moderation in the momentum in the second half of the year, the growth imbalance relative to advanced economies is expected to persist.
The sharp and broad-based recovery of the Indian economy, which started in the second half of 2009-10 continued through Q1 of 2010-11, leading to further consolidation of growth around the trend.
A normal monsoon, following a severely deficient monsoon last year, is expected to lift the agriculture sector growth to above the trend rate of growth in 2010-11.
Industrial production showed robust growth though with wide volatility around the trend. The core infrastructure sector continues to lag behind the pace of growth in industrial production.
Lead indicators of services activities suggest continuation of the momentum.
The current data on indicators of economic performance remain consistent with the 8.5 per cent growth projected in the July 2010 Monetary Policy Statement.
Given the weakening external demand conditions and the need for fiscal consolidation, sustained growth will hinge increasingly on private consumption and investment demand.
Trends in production of capital goods, capital expenditure plans of corporates, non-oil imports and growth in credit as well as financing from non-banking sources during 2010-11 so far suggest strong conditions for investment activities.
Private consumption expenditure data for the first quarter of 2010-11 and the trends in corporate sales as well as production of consumer durables point to a pick up.
Both the revenue deficit and fiscal deficit, as percentage of GDP, have been lower this year so far relative to the corresponding period of last year. There has, however, been higher growth in both revenue and capital expenditure this year. These provide demand support to the growth process.
Contribution of net exports to growth on the expenditure side of GDP was negative in the first quarter of 2010-11. The trend is expected to continue during the rest of the year.
The current account deficit in balance of payments widened in the first quarter of 2010-11 due to higher trade deficit and moderation in the surplus in the invisibles account.
Capital inflows, led by FII flows in recent months, have met the financing needs of the current account deficit.
The current account deficit, as percentage of GDP, could be expected to be higher in 2010-11 than 2.9 per cent recorded in 2009-10.
While the deficit may be fully financed by capital inflows, the potential volatility in such flows poses some risk.
The Indian rupee has appreciated on the basis of 6-currency real effective exchange rate (REER) during the year so far, over and above the significant appreciation last year. The 36 currency REER remained largely stable.
The higher inflation differential between India and major trading partners is a source of pressure on the competitiveness of Indian exports. Containing inflation, thus, is important even for improving the external balance position.
The foreign exchange reserves stood at US$ 295.4 billion as on October 22, 2010.
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