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First Quarter Review of Monetary Policy 2012-13 click here
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First Quarter Review of Monetary Policy Statement 2012-13
-Announced on the 31st July 2012

II. Domestic Outlook and Projections


31. In the April Policy, the Reserve Bank had projected GDP growth for 2012-13 at 7.3 per cent on the assumption of a normal monsoon and improvement in industrial activity. Both theses assumptions did not hold. The monsoon has been deficient and uneven so far. Also, data on industrial production for April-May suggest that industrial activity, despite some recovery, remains weak. In addition, several risks to domestic growth have intensified. First, global growth and trade volume are now expected to be lower than projected earlier. Given the greater integration of the Indian economy with the global economy, this will have an adverse impact on growth, particularly in industry and the services sector. However, the lagged impact of depreciation of the exchange rate could partly offset this. The impending “fiscal cliff” in the US in 2013, when temporary tax concessions expire and automatic spending cuts take effect, also entails additional risks to the growth outlook. Second, reflecting the lagged impact of weak industrial activity and global slowdown, the services sector growth is also expected to slow down. On the basis of the above considerations, the growth projection for 2012-13 is revised downwards from 7.3 per cent to 6.5 per cent (Chart 1).


32. In the April Policy, the Reserve Bank made a baseline projection of WPI inflation for March 2013 of 6.5 per cent. This was based, in part, on an assumption of normal monsoon. The deficient and uneven monsoon performance so far will have an adverse impact on food inflation. Notwithstanding some moderation, international crude oil prices remain elevated. This, coupled with the pass-through of rupee depreciation to import prices, continues to put upward pressure on domestic fuel price inflation. In addition, with the adjustment of domestic prices of petroleum products to international price changes still incomplete, embedded risks of suppressed inflation could also impact fuel prices in India going forward. The decline in non-food manufactured products inflation has not been commensurate with the moderation in growth. Input price pressures on account of exchange rate movements and infrastructural bottlenecks in coal, minerals and power may exert upside pressure on non-food manufactured products inflation.

33. Keeping in view the recent trends in food inflation, trends in global commodity prices and the likely demand scenario, the baseline projection for WPI inflation for March 2013 is now raised from 6.5 per cent, as set out in the April Policy, to 7.0 per cent (Chart 2).

34. Although inflation has remained persistently high over the past two years, it averaged around 5.5 per cent during the 2000s, both in terms of WPI and CPI, down from its earlier trend rate of about 7.5 per cent. Given this record, the conduct of monetary policy will continue to condition and contain perception of inflation in the range of 4.0-4.5 per cent. This is in line with the medium-term objective of 3.0 per cent inflation consistent with India’s broader integration into the global economy.

Monetary Aggregates

35. With nominal growth remaining broadly at the level envisaged in the April Policy, monetary aggregates are expected to move along the trajectories projected in the Monetary Policy Statement 2012-13. Accordingly, M3 growth projection for 2012-13 has been retained at 15 per cent and the growth in non-food credit of SCBs at 17 per cent. As always, these numbers are indicative projections and not targets.

Risk Factors

36. The projections of growth and inflation for 2012-13 are subject to a number of risks as indicated below:

i) External risks to the outlook for the Indian economy are intensifying. Adverse feedback loops between sovereign and financial market stress in the euro area are resulting in increased risk aversion, financial market volatility, and perverse movements in capital flows. With the deteriorating macroeconomic situation in the euro area interacting with a loss of growth momentum in the US and in EDEs, the risks of potentially large negative spillovers have increased. India’s growth prospects too will be hurt by this.

ii) Reflecting the setback to the global recovery as also weather-related adversities in several parts of the world, the outlook for food and commodity prices, especially crude oil, has turned uncertain. These developments have adverse implications for domestic growth and inflation.

iii) While inflation in protein items remains elevated due to structural demand supply imbalances, additional risks to food inflation have emerged from the deficient and uneven monsoon. This has the potential of aggravating inflation and inflation expectations.

iv) At current levels of the CAD and the fiscal deficit, the Indian economy faces the “twin deficit” risk. Financing the latter from domestic saving crowds out private investment, thus lowering growth prospects. This, in turn, deters capital inflows, making it more difficult to finance the former. Failure to narrow twin deficits with appropriate policy actions threatens both macroeconomic stability and growth sustainability.

Macroeconomic and Monetary Developments: First Quarter Review 2012-13 ...Click Here

Highlights of First Quarter Review of Monetary Policy Statement 2012-13....Click Here


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