Macroeconomic and Monetary Developments: First Quarter Review 2009-10
-Released on July 27, 2009
The highlights of macroeconomic and monetary developments are the following:
The Indian financial markets continued to function normally and exhibited stability with lower volatility and higher volumes in the first quarter of 2009-10. The call rates hovered around the reverse repo rate. The commercial paper market exhibited greater activity. The government securities market witnessed increase in volume in the primary segment reflecting the large borrowing programme of the Government. The yield curve has steepened, particularly at the short end reflecting ample liquidity, and in response to the large government borrowing programme.
Gross and net issuances of dated securities of the Central Government during 2009-10 are budgeted higher by 65.2 per cent and 83.4 per cent, respectively, over 2008-09. During 2009-10 (up to July 22, 2009), the Central Government completed a large part (45.4 percent) of the budgeted net borrowing programme (including amounts raised through 364-day Treasury Bills and de-sequestering of MSS account). Ample liquidity available in the system has facilitated the borrowing programme.
The credit market, which had functioned normally even when the global markets were experiencing a severe freeze, witnessed better transmission of monetary policy rates, as both deposit and lending rates which moderated in the fourth quarter of 2008-09 exhibited further moderation in the first quarter of 2009-10. The growth in non-food credit which witnessed deceleration since October 2008 has also reversed from June 2009, indicating signs of revival in demand for credit.
The WPI inflation, which was on a path of sharp decline from the high peak level of August 2008, turned negative in June 2009, and since then the negative inflation continues (-1.2 per cent as on July 11, 2009). The decline in the year-on-year inflation essentially reflects the statistical factor of high base that emanated from sharp increases in commodities prices during the first half of 2008-09.
Notwithstanding the negative WPI inflation, food articles inflation (i.e. primary as well as manufactured) remains high at 8.9 per cent (as on July 11, 2009). Inflation as per Consumer Price Indices (CPIs) also continues at elevated levels (in the range of 8.6 per cent to 11.5 per cent for different consumer price indices in May/June 2009).
Growth and Inflation Outlook
The Industrial Outlook Survey of the Reserve Bank conducted in April-May 2009 shows a turnaround in the business sentiment. For the manufacturing companies in the private sector, the business expectations indices based on an “assessment for April-June 2009” and on “expectations for July-September 2009” improved sharply by 20.3 and 14.0 per cent, respectively, over the previous quarter, when these indices had recorded their lowest levels since the inception of the Survey. The results of the latest round of Survey of Professional Forecasters’ conducted by the Reserve Bank in June 2009 indicate overall (median) growth rate for 2009-10 at 6.5 per cent, which is higher from 5.7 per cent that was reported through the findings of the earlier survey conducted in March 2009. The Survey also indicates average inflation in the fourth quarter of 2009-10 to be about 5.4 per cent.
The growth outlook for 2009-10 needs to be assessed in the context of indications emerging from lead indicators so far. While indicators such as the higher growth in core infrastructure sector, positive growth in IIP, gradual revival in demand for non-food credit, improving performance of the corporate sector in terms of both sales and profitability, gradual return of risk appetite in the capital market, more optimistic business expectations and forecasts as reflected in the Reserve Bank’s surveys could be viewed as signs of recovery from the slowdown, there are other factors which may dampen the growth outlook such as the delayed progress of monsoon, decline in exports due to the persistence of global recession, lagged impact of the negative growth in manufacturing in the last quarter of 2008-09 on services demand, negative growth in capital goods, decline in the production of commercial vehicles, and an accelerated fall in import growth suggesting dampened demand conditions.
On the inflation front, there are indications of inflation firming up by the end of the year due to the waning base effect of last year, increase in commodity prices, delayed progress of monsoon potentially driving up food prices, the inflationary implications of expansionary fiscal policy and accommodative monetary policy, and inflation expectations not declining in step with the WPI inflation in the face of CPI inflation remaining firm. The inflationary pressures may remain moderate if the protracted global recession leads to dampened commodity prices, agricultural growth remains unaffected despite the delayed progress of monsoon, and the accommodative monetary policy stance returns to normal levels.
India’s structural growth impulses continue to remain strong, given the high domestic saving rate, sound financial system, and growth supportive macroeconomic policy environment. Domestic deceleration in demand and persistent uncertainty in the global conditions, however, operate as the major drag on a faster recovery. Early indications for India suggest that the revival impulses need to strengthen further to boost the consumer and investor confidence, which could then set off a positive feedback loop to lift the growth momentum over time.
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