In the scheduled Mid-Quarter Monetary Policy Review on 15th March 2012, on the expected lines, the RBI kept the cash reserve ratio (CRR) and the policy repo rate (RR) under the liquidity adjustment facility (LAF) unchanged
Earlier, effective 10, 2012, the Reserve Bank had reduced the CRR by 75 basis points from 5.5 per cent to 4.75 per cent.
Commenting on the global economy, RBI said that there has been modest improvement in the global macroeconomic situation Since the Reserve Bank’s Third Quarter Review (TQR) of January 24, 2012. Even the recent macroeconomic data for the US economy show some positive signs. In particular, labour market conditions have improved. It says that concerns about the growth in the Euro area have abated a little but, are still around and the emerging and developing economies (EDEs) are showing signs of growth slowdown. As a result, the global growth for 2012 and 2013 is expected to be lower than earlier anticipated.
It adds, Inflation pressures in both advanced economies and EDEs moderated towards the end of 2011 on account of subdued domestic demand and correction in non-fuel commodity prices. Global crude prices, however, have spiked suddenly reflecting both geo-political concerns and abundant global liquidity, accentuating the risks to growth and inflation.
Commenting on domestic economy, RBI stated that GDP growth decelerated to 6.1 per cent in Q3 of 2011-12 from 6.9 per cent in Q2 mainly reflecting a slowdown in industrial activity. On the expenditure side, the growth moderation was mainly due to a deceleration in investment activity and weak external demand.
The Central Statistics Office (CSO) has estimated the full year growth for 2011-12 at 6.9 per cent, which is in line with the Reserve Bank’s projection.
It further says that the growth in industrial production, as reflected in the index of industrial production (IIP), moderated to 4.0 per cent during 2011-12 (April-January) from 8.3 per cent in the corresponding period a year ago.
On Inflation front, RBI has said that it is closely monitoring the inflation as it has shown some declining trend in recent months.
After remaining above 9 per cent during April-November 2011, y-o-y headline wholesale price index (WPI) inflation rate moderated to 7.7 per cent in December and further to 6.6 per cent in January 2012, before rising to 7.0 per cent in February. While moderation in WPI inflation stemmed mainly from primary food articles, fuel and manufactured products groups also contributed.
Notably, Consumer Price Index (CPI) inflation (as measured by the new series, base year 2010) for the month of January 2012 was 7.7 per cent suggesting that price pressures persist at the retail level.
Commenting on the fiscal situation, RBI said that the Centre’s fiscal conditions deteriorated during 2011-12 (April-January) with key deficit indicators already crossing the budget estimates for the full year. Apart from sluggishness in tax revenues, Government’s non-plan expenditure, particularly subsidies, increased sharply.
As indicated in the TQR, the slippage in the fiscal deficit has been adding to inflationary pressures. Credible fiscal consolidation, therefore, will be an important factor in shaping the inflation outlook.
While the recovery in the US has been progressing, economic activity in the euro area has contracted. Although abundant liquidity injection by the ECB has mitigated the immediate pressures in financial markets, a credible solution to the sovereign debt problem is yet to emerge. Sluggish global economic activity, uncertainty in the euro area and rising crude oil prices will hamper growth prospects of EDEs.
On the domestic front, while most indicators suggest that the economy is slowing down, the performance in Q4 of 2011-12 is expected to be better than that in Q3. Inflation has broadly evolved along the projected trajectory so far.
However, upside risks to inflation have increased because of the recent surge in crude oil prices, fiscal slippage and rupee depreciation. Besides, there continues to be significant suppressed inflation in fuel, fertilizer and power as administered prices do not fully reflect the costs of production.
Recent growth-inflation dynamics have prompted the Reserve Bank to indicate that no further tightening is required and that future actions will be towards lowering the rates. However, notwithstanding the deceleration in growth, inflation risks remain, which will influence both the timing and magnitude of future rate actions.
RBI is scheduled to announce Annual Credit Policy for next fiscal 2012-13 on April 17, 2012.