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Macroeconomic and Monetary Developments in the Second Quarter of 2011-12 -Released on October 24, 2011

The Reserve Bank of India today released the Macroeconomic and Monetary Developments Second Quarter Review 2011-12. The document serves as a background to the Monetary Policy Statement 2011-12 to be announced on October 25, 2011.


Overall Outlook

While inflation remains sticky, growth risks add to policy complexity

The baseline inflation path still remains sticky and broadly unchanged from earlier projections. On the other hand, growth risks have increased on account of global headwinds and domestic factors. On current assessment, growth in 2011-12 is likely to moderate slightly from that projected earlier.

While persistent high inflation is impacting growth, investment is slowing down. The fall in new corporate fixed investment since the second half of 2010-11 has been significant and can impact the pipeline investment in coming years.

Inflation risk, however, persists. The policy choices have become more complex. In this backdrop, the monetary policy trajectory will need to be guided by the emerging growth-inflation dynamics even as transmission of the past actions is still unfolding.

Various surveys conducted, both by the Reserve Bank and the outside agencies, suggest that business expectations have suffered, while inflation expectations remain high. As a further step for increased transparency in monetary policy formulation, the Reserve Bank for the first time is releasing surveys conducted by it along with the ‘Macroeconomic and Monetary Developments’, one day ahead of the policy.

Global Economic Conditions

Global growth in siege from debt overhang

Prospects for global growth appear to be declining, even though recovery has not stalled so far. There have been significant downward revisions in growth projections. Business and consumer confidence have dampened on the back of euro area sovereign debt crisis. Private sector balance sheets are at risk and significant weakness in the banking sector has re-emerged.

Global commodity prices, especially those of metals, have softened but have stayed elevated. Even after some correction, the current Brent crude oil price is still over 25 per cent higher than its average for 2010-11. The IMF has revised upwards its consumer price inflation forecast for EDEs.

Indian Economy


Growth moderating below trend in 2011-12

Growth in 2011-12 is likely to moderate to below trend. Agriculture prospects remain encouraging with the likelihood of a record Kharif crop. However, moderation is visible in industrial activity and some services.

In addition to domestic factors, global factors may slow down growth. With the increasing linkage of domestic industrial growth with global industrial cycle, some further moderation is likely ahead, given the weak global PMIs.

Capacity constraints seem to be easing in some manufacturing segments, especially cement, fertilizers and steel. Construction activity has slowed and leading indicators suggest that going forward, services growth may slightly weaken.

Aggregate Demand

Investment slowdown may impact growth ahead

Investment demand is softening as a result of combination of factors including monetary tightening, hindrances to project execution, deteriorating business confidence and slowing global economy.

Planned corporate fixed investment in new projects declined significantly since the second half of 2010-11 and has stayed low in Q1 of 2011-12. Consequently, the pipeline of investment is likely to shrink, putting growth in 2012-13 at risk.

Private consumption is also starting to soften in parts, but it remains robust overall as is evident from corporate sales performance. Sales growth continues to be healthy, but profits are under pressure.

Fiscal slippages during 2011-12 may complicate the task of aggregate demand management. Key to growth sustainability lies in supporting investment by rebalancing demand from government consumption to public and private investment.


Click Here For Second Quarter Review of Monetary Policy 2011-12

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