Thursday, March 15, 2012

Mid-Quarter Monetary Policy Review : Dt.15th: March 2012 OF RBI - Seeking Fiscal Discipline Good - But, RATE CUT CANNOT WAIT - GROWTH MUST HAPPEN - FOR INFLATION TO COME DOWN

Mid-Quarter Monetary Policy Review

Dt.15th: March 2012

The times are unusual. Earlier on, we had the Railway Budget – which was hailed by the Ruling Party, the Unions in Railways and many others – but, it saw Mamata Banerjee the leader of TMC fuming at the raising of Passenger Fares and asking for replacing Mr. Trivedi the Railway Minister who belongs to TMC with Mr. Mukul Roy, another member from TMC. On 15th, we had the Economic Survey from the Finance Minister, which had lots of visionary statements. But what the FM will do in the Budget has become a puzzle, looking at the visionary Economic Review. We will see and digest the Budget, which is the REAL THING, when it actually comes.Sri Pranab Mukherjee is one of our best and Most Astute Ministers - and we do hope he will bring forth a reasonably Good Budget.

On 15th, we also had the Mid-quarter Monetary Policy Review from the RBI. The following are the salient points from the RBI’s  Review :

Monetary and Liquidity Measures
        Cash reserve ratio (CRR) of scheduled banks remains unchanged at 4.75 per cent of their net demand and time liabilities; and 

        the policy repo rate under the liquidity adjustment facility (LAF) remains unchanged at 8.5 per cent.

        Consequently, the reverse repo rate under the LAF will remain unchanged at 7.5 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 9.5 per cent.

        RBI reduced the CRR by 75 basis points from 5.5 per cent to 4.75 per cent effective March 10, 2012 – due to persistent structural liquidity deficit beyond the Reserve Bank’s comfort level, which would have further worsened during the week of March 12-16 due to advance tax outflows.

Global Economy

        After 3rd  Quarter Review of January 24, 2012, there has been modest improvement in global macroeconomic situation. US economy shows some positive signs. In particular, labour market conditions have improved. However, the US Fed expects that economic conditions warrant exceptionally low levels for the federal funds rate at least through late 2014. 

        The immediate financial market pressures in the euro area have been alleviated to some extent by the European Central Bank (ECB) injecting liquidity of more than one trillion euro through the two long-term refinancing operations. Growth in the euro area, however, turned negative in Q4. 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.

        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.

Domestic economy


GDP growth [year-on-year (y-o-y)] 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.  

        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. While growth in the capital goods and intermediate goods sectors was negative, growth in the basic goods and consumer goods sectors decelerated marginally. Given the significant volatility in IIP numbers, the Reserve Bank also uses several other indicators to assess the overall industrial activity. The Manufacturing PMI for February suggested that industrial activity remained in an expansionary mode. While corporate sales growth in Q3 of 2011-12 was robust, margins moderated, reflecting increasing difficulty in passing on rising input prices. 


        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.

        Primary food articles inflation, which was modest at 0.8 per cent in December, turned negative (-0.5 per cent) in January 2012, before rising to 6.1 per cent in February. Despite the sharp increase in global crude oil prices, fuel group inflation moderated from 15.0 per cent in December to 12.8 per cent in February, reflecting the absence of commensurate pass-through to domestic consumers.

        Non-food manufactured products inflation moderated from 7.9 per cent in December to 5.8 per cent in February 2012, reflecting both a slowdown in domestic demand following the monetary tightening and moderation in global non-oil commodity prices. The momentum indicator of non-food manufactured products inflation (seasonally adjusted 3-month moving average inflation rate) also showed a moderating trend.

        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.

Fiscal Situation

        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.

Money, Credit and Liquidity Conditions

        The y-o-y money supply (M3) growth and non-food credit growth moderated, reflecting the slowdown in the economy. Liquidity conditions have remained significantly in deficit mode.  In order to mitigate the liquidity tightness, the Reserve Bank undertook steps to inject primary liquidity of a more durable nature through open market operations (OMOs) aggregating `1,247 billion during November 2011- March 9, 2012 and reduced the CRR by 125 basis points (50 basis points effective January 28 and 75 basis points effective March 10), injecting primary liquidity of about `800 billion. The liquidity situation has since improved and it is expected to ease further in the weeks ahead.

External sector 

        While merchandise exports growth decelerated, moderation in imports growth was less pronounced leading to a widening of the trade deficit. After the TQR, the rupee has moved in a range of `48.69 to `50.58 per USD. With sluggish demand conditions in the advanced economies impeding exports growth and  crude oil prices rising sharply, the current account deficit (CAD) is likely to remain high. The financing of the CAD will continue to pose a challenge so long as the global situation remains uncertain.


        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 from 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.


The above is the summary of the Monetary Policy Review dated 15th, March, 2012.It is largely on expected lines. 

RBI’s release of CRR to ease the tight liquidity conditions is a very welcome Measure.

It is now widely accepted that by and large there was no fiscal or administrative action to control Inflation in the economy. To simplify our perception – it looks as if Inflation is RBI’s Baby, while Growth is No one’s  Baby. 

Various Ministries, both at centre and in states, did almost nothing to curb either food inflation or non-food inflation – and left them largely to natural and market forces. This is not a healthy sign. There must be a strong Administrative mechanism to watch agricultural activity and take prompt action to raise output by increase acreage, curbing hoarding, resorting to timely imports and so on.  In India, agri exports happen easily – but not agri imports, even when agri products prices are soaring sky high.

It is a surprise – that India is waiting for the likes of Walmart to come to India and create storage conditions for Food Products, for Farmers. It is difficult to understand this stand-off of  Government, from basic agricultural needs. Proper Public-Private partnerships must be forged in India to create such storage and transportation facilities and other infrastructure needed for Agri Products. Policy actions are required on this from the central and state Agri/Food Ministries. FDI in Retail is not the panacea for all that India needs in this sector.

It was left to the Hon’ble Supreme Court to suggest river waters linkage. This must have been done from 1947 – and can even now be done in phases. In the absence of this, there is a negative thinking in many states – constructing Big dams and obstructing already flowing water from going to lower riparian states. While the Dams have huge amounts of stored water, which is constantly evaporating, lower riparian agriculture is in doldrums. Many agricultural areas are getting reduced to virtual Deserts. We urgently need a national Water Policy – to prevent these disasters from spreading further. If this is done – India will never face Food shortages or Inflation.
Food Planning must be FOR SURPLUSES – NOT FOR SHORTAGES. This must be the core of any Policy.

Surpluses can be shared with poverty stricken friendly countries – or even with others. But, right now – India still has vast population below poverty levels – which means – at near starvation levels. Our Food Inflation statistics do not take into account huge need for additional food articles – to make Indian Population strong and healthy.

Industrial Growth is coming down. But, non-food inflation – in manufactured articles – persists. High Interest Rates and High taxes make Indian Products costlier than imported products.  Do we need Industrial growth or Industrial deceleration? This is the crucial question that must stare in the face of every policy / decision maker.

Now – RBI’s  stand is if inflation comes down, we will reduce Interest Rates. 

But, only if Interest Rates come down from present sky high levels,  Industrial Growth will pick up, our products will become competitive vis a vis Chinese, Vietnamese and Taiwanese products etc and only when Industrial Growth picks up to meet demand – Inflation will come down.

Now it is like an age-old proverb which says: marriage will happen if madness goes; but madness will go only when marriage happens. 

Madness is due to non-performance of marriage. So marriage is easier to perform, before curing madness.

No one can find fault with RBI seeking more fiscal discipline from Government and reduction in Deficit financing. We do hope, Finance Ministry and other Ministries got the Message of the RBI. The Message is in very clear terms and very timely too. 

But, in real action terms, increasing prices of Oil, diesel and Gas is not a solution at all. This, as in the past, will send a huge, uncontrollable Inflation spiral right across all sectors of economy.  This is not the time for this measure. Expenditure on Unproductive schemes  must be cut down. This is the only way. RBI must send similar message to states. Their unproductive expenditure also needs to be pruned drastically. Else, RBI must impose limits on their borrowings. There cannot be room for fiscal profligacy by States in current Indian situation. Money must be well spent on productive schemes.

This is one side of the Picture. And, this is however no reason – for keeping the INTEREST RATES SO HIGH – and stifling Growth of Indian Industrial activity. Right now – in Indian Markets, we find more Chinese, Taiwanese and Vietnamese products than Indian Products – thanks to Government taxation apathy and RBI’s Rate apathy. We are driving out Indian Products from Indian markets, which means huge unemployment conditions, decelerating Industrial Growth, and long term social chaos. If they are not yet visible, it is because, we do not want to see them.

CSO needs to collect more statistics and better statistics -  and also give us its Expert Interpretation on Ground realities. (That of course, another story)

Even large Industries are currently crying for quick reversal of the current High RATES. Hope the voices of industries like TATA steel and many, many others, who are reeling under the impact of High interest rates is understood by RBI and Finance Ministry both – and a quick reversal of Rates follows soon.

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