Macroeconomic and Monetary Developments : Second Quarter Review 2012-13
-Announced on 29th October 2012 by RBI
The Reserve Bank of India today released the Macroeconomic and Monetary Developments Second Quarter Review 2012-13. The document serves as a backdrop to the Second Quarter Review of Monetary Policy Statement 2012-13 to be announced on October 30, 2012.
Growth-inflation balance warrants careful policy calibration as growth slows but inflation risks persist
As macro-risks from inflation and twin deficits recede further, that could yield space down the line for monetary policy to respond more effectively to growth concerns.
Speedy implementation of recent policy measures announced by the government and sustained reforms are important for turning the economy around.
Various surveys, including the Reserve Bank’s Industrial Outlook Survey suggests that business sentiments remain weak. Global growth projections, including that for India, are getting revised downwards.
The median projection for 2012-13 in the Reserve Bank’s Survey of Professional Forecasters has been lowered to 5.7 per cent from 6.5 per cent for growth, while that for average WPI inflation is revised upwards to 7.7 per cent from 7.3 per cent.
Global Economic Conditions
Global growth prospects weaken, contagion risks remain
Global growth prospects, both in advanced economies (AEs) and in emerging and developing economies (EDEs) have weakened. In October 2012, the International Monetary Fund lowered its growth projections for both these groups.
Euro area risks have affected business confidence and caused global trade to decelerate, thus impacting external demand. Downside risks to global growth stems from a possible US fiscal cliff leading to a sudden and sharp fiscal consolidation.
With slack in output and employment in AEs and falling growth in many large EDEs, global inflation pressures are likely to stay muted for the rest of 2012.
Risks of spillovers from global financial markets remain. Unconventional monetary policies have transitorily moderated uncertainties, but the underlying stress has not diminished with incomplete deleveraging and unfinished financial sector reforms.
Growth remains sluggish, reforms may arrest downturn
Economic indicators suggest that slowdown has continued in 2012-13. However, recent policy reforms should help in arresting the downturn. They may, on their successful implementation, support recovery later.
The potential growth rate of the Indian economy that peaked around the middle of 2007-08, has since continued its downward slide into Q1 of 2012-13 to around 7.0 per cent. With negative output gap persisting, growth in 2012-13 is likely to fall short of the Reserve Bank’s earlier projection.
Improved prospects for Rabi, following the late monsoon revival will partly offset the fall in Kharif output. Contraction in the mining sector continues following a clamp-down on illegal mining. Manufacturing output has stagnated due to weak investment and external demand. Leading indicators of services signals moderation.
The Reserve Banks’ Order Books, Inventory and Capacity Utilisation Survey show capacity utilisation was at its lowest in 13 quarters, though notably, the new order positions has improved.
Revival of the investment cycle hinges on resolution of policy uncertainties, particularly those facing the power and coal sectors. While substantive progress has been made towards new fuel supply agreements (FSAs), coal shortages are likely to persist.
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