First Quarter Review of Monetary Policy Statement 2012-13
-Announced on the 31st July 2012
I. The State of the Economy
Domestic Economy (contd)
17. The Consumer Price Index (CPI new series) inflation remained in double-digits in Q1 of 2012-13, driven by both food and non-food prices. The divergence between WPI and CPI inflation was on account of two factors. First, there are differences in the composition and weights of commodities, especially of food items in the two indices. Second, even in respect of similar items, inflation was higher in CPI than in WPI, suggesting that besides the incidence of higher service taxes, moderation in non-food manufactured products prices has not yet been transmitted to the retail level. The rate of increase in the prices of services, which is included in CPI but not in WPI, was also high.
18. Among other factors, urban households’ inflation expectations, as per the latest survey conducted by the Reserve Bank, increased slightly in Q1 of 2012-13 after a decline in the previous quarter. Notwithstanding some moderation, wage inflation in rural and urban areas remains relatively high.
19. An analysis of corporate performance in 2011-12, based on a common sample of 2,273 non-government non-financial companies, indicates that the sales growth remained positive for the year even after adjusting for inflation. However, earnings decelerated due to an increase in expenditure, indicating decline in pricing power. Early results for Q1 of 2012-13 suggest that pricing power remained subdued.
20. While the money supply (M3) growth, at 14.3 per cent in mid-July, was marginally lower than the indicative trajectory of 15 per cent, non-food credit growth at 17.4 per cent was slightly above the indicative projection of 17 per cent. If we include banks’ investment in commercial paper and other instruments, non-food credit growth was even higher at 17.7 per cent.
21. The flow of resources to the commercial sector, from both bank and non-bank sources, increased to `1.9 trillion in 2012-13 so far (up to July 13, 2012) as compared with `1.4 trillion during the corresponding period of last year. Amongst non-bank sources, resources raised through commercial paper increased significantly.
22. Following the reduction in the repo rate in April, several commercial banks reduced their lending rates. The modal base rate of scheduled commercial banks (SCBs) declined by 25 bps to 10.50 per cent during April-June 2012. Significantly, on the basis of the weighted average lending rate (WALR) of commercial banks, adjusted for inflation, real rates are now lower than they were during the high growth five-year period of 2003-08. Banks’ actions on deposit rates, however, were muted due to the slowdown in deposit growth.
23. Liquidity conditions have eased considerably since the April Policy. The average daily net borrowing under the liquidity adjustment facility (LAF), which was 2.2 per cent of average net demand and time liabilities (NDTL) in Q4 of 2011-12, declined sharply to 1.3 per cent in Q1 of 2012-13 and further to 0.7 per cent in July 2012 (up to July 26, 2012). The turnaround in liquidity conditions was due to a decline in government cash balances with the Reserve Bank, injection of liquidity of about `860 billion by way of open market operation (OMO) purchases of securities and increased use of the export credit refinance facility by banks after the increase in the limit effected in the June Mid-Quarter Review. Reflecting the improvement in the liquidity situation, the weighted average call money rate, which is the operating target of the Reserve Bank, stayed close to the policy repo rate.
24. During Q1 of 2012-13, yields on government securities softened reflecting an improvement in liquidity, moderation in inflation and concerns about weakening of domestic and global growth. The 10-year benchmark yield was significantly lower at 8.11 per cent on July 26, 2012 as compared with 8.63 per cent at end-March 2012.
25. Housing prices continued to rise despite the decline in volume of transactions. The Reserve Bank’s quarterly housing price index suggests that prices increased in Q4 of 2011-12 in most of the 9 cities for which the index is compiled.
26. During April-May 2012, while food subsidies were lower, fertiliser subsidies were more than twice the previous year’s level. Clearly, if the target of restricting the expenditure on subsidies to under 2 per cent of GDP in 2012-13, as set out in the Union Budget, is to be achieved, immediate action on fuel and fertiliser subsidies will be required.
27. In 2011-12, the CAD rose to US$ 78 billion (4.2 per cent of GDP) from US$ 46 billion (2.7 per cent of GDP) in the previous year, largely reflecting a higher trade deficit on account of subdued external demand and relatively inelastic imports of petroleum, oil and lubricants (POL) as well as gold and silver. As capital inflows fell short of the CAD, there was a net drawdown of reserves (on a BoP basis) to the extent of US$ 13 billion in contrast to a net accretion to reserves of more or less of the same order in the previous year.
28. Reflecting the fragile global situation, India’s merchandise exports declined by 1.7 per cent to US$ 75 billion during Q1 of 2012-13. However, imports declined even more sharply, by 6.1 per cent, to US$ 115 billions led by a decline in imports of non-oil non-gold commodities. As a result, the trade deficit was lower at US$ 40 billion in Q1 of 2012-13 as compared with US$ 46 billion in the corresponding period of the previous year. Based on preliminary data, services exports rose moderately by 3 per cent to US$ 35 billion, while services imports surged by 19 per cent to US$ 21 billion in Q1. Accordingly, net services exports of US$ 14 billion in Q1 of 2012-13 were lower by 12 per cent as compared with Q1 of 2011-12.
29. During 2012-13 so far (July 20, 2012), the 6-, 30- and 36-currency trade weighted real effective exchange rates (REER) depreciated in the range of 7-10 per cent, primarily reflecting the nominal depreciation of the rupee against the US dollar by around 9 per cent. The depreciation was mainly on account of the slowdown in capital inflows, the large current account deficit, domestic economic uncertainty and growing apprehensions about the euro area problem.
30. Exchange rate depreciation in Q1 of 2012-13 was not specific to India; most EDE currencies also depreciated. However, among the EDEs with large current account deficits, the depreciation of the Indian rupee was relatively large, reflecting moderation in capital inflows.
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RBI CREDIT AND MONETARY POLICIES (1999-2013)