Mid-Quarter Monetary Policy
Review
Dt.15th: March 2012
OF
RESERVE BANK OF INDIA
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
• Growth
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.
Inflation
• 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.
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 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.
Guidance
• 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.
COMMENTS
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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