Professional Documents
Culture Documents
Macroeconomic and
Monetary Developments
Second Quarter Review 2011-12
Overview i - iii
I. Output 1-8
V. Financial Markets 28 - 36
Overview
During Q3 of 2011, global growth in growth projections for the advanced
prospects further deteriorated, which may have economies. Risks to global growth have
an adverse impact on the Indian economy. The amplified with business and consumer
intensity of the impact will depend on how deep confidence dampening on the back of the
is the global downturn which, in turn, is related deepening sovereign debt crisis in Europe.
to how the current and future financial stress Private sector balance sheets are at risk and
in global markets are addressed. In a baseline significant banking sector weakness is re-
scenario, growth in India in 2011-12 is likely emerging as a result. Importantly, financial
to be somewhat below trend. stress could extend beyond euro area
boundaries. If the euro area slows down further,
2. Inflationary pressures are strong and
as currently expected, it may have a domino
persistent due to structural rigidities,
effect on the global economy with spillovers to
continuing strong demand and the adaptive
emerging markets.
nature of inflation expectations. The path of
inflation is sticky and remains broadly in line 5. In its World Economic Outlook of
with earlier projections. With falling global September 2011, the International Monetary
commodity prices partly offset by rupee Fund (IMF) significantly lowered its global
depreciation, the risks to inflation projections growth forecast by 0.3 percentage points for
are now balanced. 2011 and 0.5 percentage points for 2012. The
world economy is still expected to grow at 4.0
3. Monetary policy has been tightened
per cent in both these years. The cuts in growth
considerably with an effective 500 bps rate hike
projections were deeper for advanced
cumulatively and a 100 bps reserve requirement
economies (AEs), but were also pervasive
increase in a span of 20 months since February
among emerging and developing economies
2010. Monetary transmission has helped raise
(EDEs). The IMF also lowered its growth
deposit and lending rates, correct the mismatch
forecast for India. Its current projections of 7.8
between deposit and credit growth and dampen
per cent for 2011 and 7.5 per cent for 2012 in
aggregate demand. Though the risks to growth
market prices correspond to a projection of 7.6
are becoming visible, the challenge of bringing
per cent growth at factor cost for 2011-12 and
down inflation to an acceptable level on a
2012-13.
sustainable basis still remains significant.
Global Economic Conditions Global commodity prices softening, but
consumer inflation persists
Global growth risks intensify as debt crisis
6. Global commodity prices, especially those
erodes confidence
of metals, have softened significantly. However,
4. Global growth prospects appear to be even after some correction, the current Brent
declining, even though recovery has not stalled. crude oil price is still over 25 per cent higher
There have been significant downward revisions than its average for 2010-11. The IMF has
Macroeconomic and Monetary Developments Second Quarter Review 2010-11
revised upwards its consumer price inflation in new projects declined significantly since the
forecast for EDEs by 0.6 percentage point to second half of 2010-11. Consequently, the
7.5 per cent for 2011, while leaving the pipeline of investment is likely to shrink, putting
projection for AEs unchanged at 2.6 per cent. 2012-13 growth at risk. Private consumption is
also starting to soften in parts, but it still
7. The global inflation path remains unclear.
remains robust as is evident from corporate
A strong softening bias has been induced in by
sales performance. There are also risks to
the impending global slowdown. Producers
demand management if government
pricing power remains low in AEs. Wage
consumption spending overshoots budget
inflation is also likely to be restrained as
estimates. As such, a key to growth
unemployment still remains a significant
sustainability lies in supporting investment by
challenge in these economies. However, this is
rebalancing demand from government
counterbalanced by inflation persistence in
consumption to public and private investment.
EDEs backed by demand conditions. Also, there
are upside risk to global commodity prices External sector
stemming from excessively accommodative
Widening CAD poses risk if global trade
monetary policy stance in AEs.
and capital flows shrink
Indian Economy: Developments and 10. The Current Account Deficit (CAD)
Outlook widened in Q1 of 2011-12. Exports are expected
Output to decelerate in H2 of 2011-12. If global
Growth moderating below trend in financial market stress increases further and
2011-12 affects capital flows to the emerging markets,
financing of CAD could pose a challenge. The
8. Growth in 2011-12 is likely to moderate Indian rupee has seen significant nominal and
to below trend. Agriculture prospects remain real depreciation in Q2 of 2011-12. However,
encouraging with the likelihood of a record this trend has been in line with that of other
Kharif crop. However, moderation is visible in emerging market currencies, which too
industrial activity and some services, mainly depreciated significantly as US dollar
construction and community, social and appreciated with flight to safety amidst rising
personal services. Given the linkage of domestic risk aversion.
industrial growth with global cycle, some
further moderation is likely ahead given the Monetary and Liquidity Conditions
weak global PMIs. Capacity constraints seem Liquidity conditions remain comfortable,
to be easing in some manufacturing activity, credit growth stays above trajectory
especially cement, fertilizers and steel. 11. Though during Q2 of 2011-12, liquidity
Construction activity has slowed and leading
conditions remained in deficit mode in line with
indicators suggest that services growth may
the policy objective, it remained comfortable.
slightly weaken ahead.
Base money has decelerated as currency growth
Aggregate demand moderated. Money (M 3) growth, however,
moderated less sharply as the money multiplier
Investment slowdown may impact growth
ahead increased. Bank credit growth is also presently
above the indicative trajectory. This has been
9. Indications are that investment demand is supplemented by increased resource flows from
softening as a result of combination of factors non-banking sources. Going forward, credit
including monetary tightening, hindrances to growth is expected to moderate as growth
project execution and deteriorating business slows down. Monetary transmission is still
confidence. Planned corporate fixed investment unfolding in response to significant monetary
ii
Overview
tightening since February 2010. However, real earlier rise in global commodity prices, the
interest rates are still low and supportive of favorable impact, arising from the transmission
growth. of falling global commodity prices is also likely
to be limited. Moreover, the benefit from the
Financial Markets
recent fall in global oil prices has been offset
Spillovers contained in domestic equity by rupee depreciation. Domestic price pressures
and currency markets as risk aversion and still remain significant and broad-based. Food
volatility is back in global markets price inflation remains high as a result of
12. The US sovereign rating downgrade and structural mismatches in non-cereal primary
the deteriorating sovereign debt situation in the food articles and large MSP revisions. Real
euro area caused significant pressures in global wage inflation has been significant in 2010-11
financial markets during Q2 of 2011-12. Rising and the wedge between wage inflation and CPI
risk aversion caused credit spreads to widen, inflation has increased further in Q1 of 2011-
and most markets experienced increased 12. In sum, the inflation challenge remains
volatility. Volatility spillovers impacted significant.
domestic equity and currency markets, but were Macroeconomic Outlook
contained by providing adequate rupee and
forex liquidity. Rupee depreciation and the fall Growth risks amplify while sticky inflation
in equity indices in Q2 of 2011-12 were makes policy choices difficult
comparable to the patterns in most other 14. Growth risks have increased on account
emerging markets. Money market rates of global headwinds and domestic factors. The
remained in line with policy signals, while baseline inflation path still remains sticky and
G-sec yields hardened after the announcement broadly unchanged from earlier projections.
of additional market borrowing. This has made policy choices more complex.
Price Situation Some sacrifice of growth is inevitable in the
current milieu of high inflation. On the current
High inflation likely to persist in near-term assessment the growth in 2011-12 is likely to
before moderating as falling global moderate slightly from that projected earlier.
commodity prices provide limited comfort Various surveys conducted suggest that business
13. Upside risks to inflation persist in EDEs expectations have suffered, while inflation
which have experienced elevated inflation for expectations remain high. At the same time
more than a year. Global commodity prices have inflation risk persists. In this backdrop, the
eased, but the levels remain high, especially for monetary policy trajectory will need to be
crude oil. Financialisation of commodities has guided by the emerging growth-inflation
made the future commodity price path dynamics even as transmission of the past
uncertain. With incomplete pass-through of the actions is still unfolding.
iii
I. OUTPUT
Global recovery looked healthy till recently, but slowing momentum was witnessed in Q3 of
2011. Moderation in global growth is also expected ahead as a result of waning of business
and consumer confidence. Risks to domestic growth have amplified because of these global
headwinds. Notwithstanding a satisfactory monsoon and a possible record kharif crop output,
overall growth in the second half of 2011-12 is likely to remain below trend. Moderation in
activity is apparent in industry, though the fall is exacerbated by a few volatile components.
The services sector has been resilient so far but construction, which is important for its large
employment potential, is cooling off.
Global growth in siege from debt overhang in September after rising by 57,000 in August,
I.1 The global growth outlook has but the labour force also grew, leaving
deteriorated significantly over the last quarter. unemployment unchanged at 9.1 per cent.
Global recovery, which appeared healthy till Euro area growth at heightened risk,
recently, now appears to be in siege from the emerging and developing economies may
sovereign debt overhang. Financial instability witness softening
arising from unresolved sovereign debt issues,
I.3 Growth prospects for the euro area are at
especially in the euro area, is impacting business
heightened risk, with moderation likely even for
and consumer confidence, leading to risk
Germany, as external demand weakens. Euro
aversion and dampening of demand and supply
area growth decelerated from 2.5 per cent y-o-
of credit. This, in turn, is acting as a drag on
y in Q1 of 2011 to 1.6 per cent in Q2 and is
aggregate demand and choking recovery from
expected to decelerate further in the second half
the 2008 crisis in the advanced economies.
due to moderating global demand, falling
Risks of spillovers from sovereign debt crisis
consumer and business confidence and stressed
to the global banking system remain large.
financing conditions in the backdrop of the debt
I.2 The US economy grew by 1.3 per cent in crisis. The Japanese economy is on a
Q2 of 2011 (annualised q-o-q), after negligible downswing, reflecting the impact of the
growth in Q1 (Chart I.1). The picture ahead is earthquake/tsunami but may rebound going
not clear, as gauged from the October 2011 ahead as reconstruction accelerates.
Beige Book of the Federal Reserve. The latest
I.4 Emerging and developing economies
news flow suggests that the recovery, even
(EDEs) had experienced robust recovery from
though weak, is holding so far. The US Institute
the crisis although their growth has also slightly
for Supply Management (ISM) manufacturing
moderated in recent quarters. There may be
index that serves as a Purchasing Managers
further slowing due to monetary tightening,
Index (PMI) improved to 51.6 in September
2011 from 50.6 in August. However, its forward- weak external demand and volatile capital
looking new orders index remained in flows, yet the slowdown is expected to be less
contraction mode. Non-manufacturing ISM for pronounced than in the advanced economies.
US slowed down marginally in September 2011 I.5 China may register some moderation in
from the previous month, but still remains in growth as a fallout of the slowdown in global
expansion mode. Moreover its production growth, the impact of monetary tightening and
component remained strongly expansionary and emerging stress in financial markets on the back
accelerated in September. In contrast to signs of ongoing asset price correction. China's GDP
of a downturn, payrolls increased by 1,03,000 growth decelerated for the third consecutive
1
Macroeconomic and Monetary Developments Second Quarter Review 2010-11
12 2
0
8
Per cent
Per cent
-2
4
-4
0
-6
-4
2008
2007
2009
2010
-8
2011F
2012F
2009Q1
2010Q1
2011Q1
2009Q3
2010Q3
2009Q2
2010Q2
2011Q2
2009Q4
2010Q4
World Advanced Economies
Emerging and Developing India US UK Japan Euro area EU27
Source: IMF Economies China Source: Eurostat and BEA Note: Euro area is Euro 17
-2 7
-4
-6
5
-8
-10
-12 3
2009Q1
2010Q1
2011Q1
2009Q3
2010Q3
2011Q2
2009Q2
2010Q2
2009Q4
2010Q4
2001
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
2003
2005
2008
1999
2007
2009
2002
2006
2000
2004
2010
US UK Japan Euro area EU27 US UK Japan Euro area
Source: Eurostat and BEA Note: Euro area is Euro 17 Source: Eurostat Note: Euro area is Euro 17
quarter with y-o-y growth recorded at 9.1 per the first quarter of the previous year, moderation
cent in Q3 2011, the lowest in more than two was evident in the industry and services sectors
years. Chinese exports have also slowed, (Table I.1). The deceleration was particularly
recording only 17 per cent y-o-y rise in marked for the industrial sector. However,
September 2011, the lowest in seven months despite some moderation, growth is only slightly
due to dwindling growth in Europe, Chinas below trend (Chart I.2).
largest trading partner. However, a slowdown
in Chinese economy may induce it to rebalance I.7 At the sectoral level, agriculture growth
from external trade towards domestic was supported by improved rabi crop for 2010-
consumption which may lead to adjustments in 11, while the slackening of industrial growth
the countries that run a huge deficit with China. was reflected in the mining and quarrying and
Output gap widens marginally as growth manufacturing sectors. The services sector
moderates witnessed moderation on account of a fall in
I.6 During the first quarter of 2011-12, real growth rate of all its sub-components except
GDP growth moderated to 7.7 per cent, trade, hotels, transport and communication.
decelerating for the third successive quarter and The sharp deceleration in the growth of the
recording the lowest rate in the previous five construction sector, in particular, is likely to
quarters. While agriculture sector registered a negatively impact capital formation, going
considerably improved performance vis-a-vis forward.
2
Output
I.8 Downside risks to growth are likely to weighted rainfall index (PRN) of the Reserve
emanate from the impact of monetary policy in Bank and the area weighted rainfall index of
the context of high domestic inflationary the India Meteorological Department (IMD)
pressures and the worsening global were at 101 per cent (Chart I.3). The reservoir
environment. These add further downside risk position as on October 20, 2011 was also much
to growth projection of 8.0 per cent for 2011- higher than during the corresponding period last
12, the baseline scenario in the First Quarter year. The timely arrival and normal progress of
Review of Monetary Policy of July 2011. the monsoon, combined with equitable spatial
distribution, contributed favourably to kharif
Agricultural prospects encouraging sowing. Till October 14, 2011, sowing under
I.9 The south-west monsoon in 2011-12 was all kharif crops was 2.4 per cent higher than in
2010-11 and was also higher than the normal
1 per cent above the long period average, with
area sown (Table I.2).
excess/normal in 92 per cent of the geographical
area of the country. For the season as a whole I.10 As per the First Advance Estimates,
(June-September 2011), the production production of major kharif crops in 2011-12 is
10.0 10.0
8.0 8.0
Per cent
Per cent
6.0
6.0
4.0
4.0
2.0
2.0
0.0
0.0
1997-98:Q1
1998-99:Q1
1999-00:Q1
2000-01:Q1
2001-02:Q1
2002-03:Q1
2003-04:Q1
2004-05:Q1
2005-06:Q1
2006-07:Q1
2007-08:Q1
2008-09:Q1
2009-10:Q1
2010-11:Q1
2011-12:Q1
1997-98:Q1
1998-99:Q1
1999-00:Q1
2000-01:Q1
2001-02:Q1
2002-03:Q1
2003-04:Q1
2004-05:Q1
2005-06:Q1
2006-07:Q1
2007-08:Q1
2008-09:Q1
2009-10:Q1
2010-11:Q1
2011-12:Q1
3
Macroeconomic and Monetary Developments Second Quarter Review 2010-11
Chart I.3: PRN Index vis-a-vis IMD Index due to the satisfactory performance of the
135
monsoon. Thus, growth prospects of the
agricultural sector in the current year appear to
125
be good.
115
Threshold Improvement in productivity of major
105
crops in recent years
95
I.11 The agricultural sector has witnessed
85 resurgence in recent years. The sector was a
75
key driver of growth during 2010-11.
The increased agricultural production in recent
8-Jun
15-Jun
22-Jun
29-Jun
7-Sep
14-Sep
21-Sep
28-Sep
6-Jul
13-Jul
20-Jul
27-Jul
3-Aug
10-Aug
17-Aug
24-Aug
31-Aug
years has been mainly due to improvement in
IMD 2010 PRN 2010
IMD 2011 PRN 2011 productivity, while the area under cultivation
has remained more or less constant for
expected to be higher than in the previous year. major crops (Chart I.4). With a view to ensuring
This is significant given the record production food security to the growing population,
of foodgrains during 2010-11. The prospects of productivity gains need to be consolidated and
rabi crop are also perceived to be favourable sustained.
4
Output
Chart I.4: Average Growth in Yield - Chart I.5: Food Stock and its Determinants
Major Crops 35 70
6.0 5.7 30 60
5.5
5.0 25 50
Million tonnes
Million tonnes
20 40
4.0
3.1
15 30
Per cent
3.0 2.6 10 20
2.1 2.1 2.1
2.0 1.8 5 10
1.2
1.0 0 0
0.6
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
July-11
Aug-11
Spe-11
Oct-11
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
0.2
0.0
-1.0 -0.9
Procurement Stock (RHS)
1999-2005 2005-11 Off-take Quarterly Norm (RHS)
Note: 1. Data for off-take is up to June 2011 and stock as on October 1, 2011.
Rice Wheat Coarse Cereals 2. Procurement and off-take data are monthly figures.
Pulses Foodgrains Oilseeds 3. Procurement for October 2011 is as on October 13, 2011.
Food security and food stock management Produce Market Committee (APMC) Act allows
remain a challenge for contract farming and markets in private/co-
operative sectors. So far 17 States/Union
I.12 The current stock of foodgrains, at around
Territories have amended their APMC Acts and
52 million tonnes, is much higher than both the
the rest are in the process of doing so. Effective
quarterly buffer and security reserve
implementation of the model Act is necessary
requirements (Chart I.5). This level of stocks is
for developing a nation-wide agricultural
sufficient to meet the off-take required for
market.
various welfare schemes under the public
distribution system (PDS). However, larger Industrial growth moderates amidst
coverage and enhanced entitlement under the large volatility
PDS, as envisaged under the proposed National
I.14 The first five months of 2011-12 witnessed
Food Security Bill, may necessitate additional
significant moderation in the growth of
procurement. This would require creation of
industrial production to 5.6 per cent from 8.7
additional storage facilities.
per cent in the corresponding period of 2010-
I.13 Long term food security entails going 11. The slowdown in production was driven by
beyond self-sufficiency to food surplus. The manufacturing and mining, while electricity
country is not yet self-sufficient in pulses and recorded robust growth (Table I.3).
oilseeds. Latest data available from the
consumer expenditure survey of 2009-10 I.15 Manufacturing sector growth decelerated
conducted by the National Sample Survey significantly to 6.0 per cent during April-August
Office (NSSO) suggests that there has been a 2011 from 9.2 per cent during the corresponding
structural change in food consumption pattern period of last year. The lower growth in
towards protein-rich food items, both in rural manufacturing was on account of deceleration/
and urban areas. Simultaneously, the share of negative growth in 14 out of 22 industry groups.
cereals in food has declined. A situation when As per use-based classification, moderation in
the demand for high value items such as meat growth was evident in all categories except basic
and fish, eggs, fruit and vegetables is rising goods and consumer non-durables.
faster than supply, calls for an overhaul of the I.16 The sharp moderation in manufacturing
entire supply chain mechanism. Development growth was reflective of deceleration in
of vegetable clusters and terminal market production of both capital and intermediate
complexes under the public-private partnership goods (Chart I.6). There has been significant
model is a significant step which holds immense volatility in the production of capital goods in
potential for better post-harvest management the recent period. Volatility measured by
and price discovery. The model Agriculture standard deviation is 3.2 for IIP excluding
5
Macroeconomic and Monetary Developments Second Quarter Review 2010-11
Table I.3: Index of Industrial Production Sectoral and Use-Based Classification of Industries
(Per cent)
Industry Group Weight in Growth Rate Weighted Contribution#
the IIP Apr-Mar Apr-Aug Apr-Mar Apr-Aug
2010-11 2010-11 2011-12 P 2010-11 2010-11 2011-12 P
1 2 3 4 5 6 7 8
Sectoral
Mining 14.2 5.2 7.7 0.2 7.3 10.1 0.2
Manufacturing 75.5 9.0 9.2 6.0 86.7 85.4 84.8
Electricity 10.3 5.5 4.1 9.5 5.9 4.5 15.0
Use-based
Basic Goods 45.7 6.0 4.9 7.4 29.1 23.5 52.0
Capital Goods 8.8 14.8 18.9 7.2 25.1 28.2 18.0
Intermediate Goods 15.7 7.4 9.2 1.0 12.5 15.1 2.6
Consumer Goods (a+b) 29.8 8.6 8.9 4.8 33.3 33.2 27.4
a) Consumer Durables 8.5 14.2 16.3 4.3 24.0 26.1 11.4
b) Consumer Non-durables 21.3 4.3 3.4 5.1 9.3 7.1 16.0
General 100.0 8.2 8.7 5.6 100.0 100.0 100.0
P : Provisional. # : Figures may not add up to 100 due to rounding off.
Source: Central Statistics Office.
capital goods, which is lower than 4.6 for the measure of IIP (excluding volatile items)
overall IIP during the period April 2009 to suggests stronger growth in 2011-12 so far than
August 2011. The Reserve Banks truncated that suggested by general IIP.
Chart I.6: Industrial Growth (Y-o-Y) I.17 The top five performing industries
accounted for around 90 per cent of the growth
15.0
in the manufacturing sector during April-August
2011 (Chart I.7).
10.0
Domestic industrial growth linked to
Per cent
5.0
global cycle
I.18 Going forward, in addition to the domestic
0.0 factors, some adverse impact on domestic
industrial growth may come from the slowing
global manufacturing growth. Co-movement
Feb-11
Apr-11
Jun-11
Aug-11
Apr-09
Jun-09
Aug-09
Oct-09
Dec-09
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
-5.0
has been observed between the Indian and
IIP 3-month Moving Average Seasonally Adjusted IIP
IIP without capital goods Truncated IIP global industrial production in recent years
20 19.1 80
70 63.7
15.0
15 60
Per cent
Per cent
50
10 40 36.2
30
4.3
5 17.2
20
1.0 1.0 10.6
10
0
Top 5 industries Bottom 17 industries 0
Top 5 industries Bottom 17 industries
2009-10 2010-11 Apr-Aug 2011-12 2009-10 2010-11 Apr-Aug 2011-12
6
Output
15
10
Bank shows a decline in new orders during the
5 first quarter of 2011-12. This is reflected in
0 lowering of capacity utilisation to 72.3 per cent
-5 in Q1 of 2011-12 from 77.8 per cent in Q4 of
-10 2010-11, mainly due to seasonal factors (Chart
-15
I.10). New orders and capacity utilisation
-20
declined noticeably in basic metals, textiles,
Apr-11
Aug-11
Apr-08
Aug-08
Dec-08
Apr-07
Aug-07
Dec-07
Apr-09
Aug-09
Dec-09
Apr-06
Aug-06
Dec-06
Apr-10
Aug-10
Dec-10
machinery and equipment, food products and
Global India
Advanced Economies Emerging Economies
beverages, and motor vehicles industries.
I.21 Capacity utilisation differed across various
(Chart I.8). The correlation between the global infrastructure industries during the first four
and Indian industrial growth rates during months of 2011-12. While it was over stretched
October 2008-August 2011 is 0.91. The adverse in petroleum refinery products; cement,
impact may come mainly through trade channel fertiliser and finished steel industries showed
as the global demand for intermediates and lower capacity utilisation in relation to 2010-
finished goods falls. However, some impact may 11 (Table I.4).
also come through the capital flow channel as
Chart I.10: OBICUS (Capacity Utilisation)
financing costs increase with risk aversion.
Wealth effects from lower collateral valuations 78
2011-12:Q1
2008-09:Q1
2009-10:Q1
2010-11:Q3
2008-09:Q3
2009-10:Q3
2010-11:Q2
2008-09:Q2
2009-10:Q2
2010-11:Q4
2008-09:Q4
2009-10:Q4
25
7.5 20
15
9.8
Per cent
Per cent
9.3 9.3
10 6.6
6.0 6.1 5.34.7 6.1 5.3
4.5 4.6
5 2.8
0.6 1.2
0
4.5 -5 -2.4 -2.8
-10 -8.9
Natural
Gas
Fertilisers
Crude Oil
Coal
Steel
Overall
Refinery
Products
Electricity
Cement
3.0 -15
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
7
Macroeconomic and Monetary Developments Second Quarter Review 2010-11
8
II. AGGREGATE DEMAND*
Of late, there are signs of aggregate demand softening reflecting a combination of factors
including monetary tightening, hindrances to execution of projects and deteriorating business
confidence. Corporate investment intentions in new projects declined sharply since Q3 of
2010-11 and remain subdued. Private consumption has started to dampen with rising interest
rates, but is still reasonably strong. However, risks to demand management persist from
overshooting of government expenditures. With investment falling more than anticipated,
and consumption responding less than intended, there is a need to rebalance private as well
as government spending from consumption towards investment to sustain potential output
growth.
II.2 Some softening in investment demand was GDP growth improves even as private
anticipated with significant monetary policy consumption growth moderates
tightening since February 2010. However, the II.4 Expenditure-side GDP estimates showed
fall was aggravated by a combination of factors. an improvement in growth during Q1 of 2011-
Non-monetary factors, such as hindrances to 12. Real GDP growth at market prices improved
execution and uncertainty about the global to 8.5 per cent during Q1 of 2011-12 compared
economy appear to have significantly impacted with 7.7 per cent observed in the previous
investment climate. There are risks of global quarter, solely on account of the investment
factors causing further erosion in investment component. Even so, the growth rates of GDP
levels. Investment in the power sector has been at market prices and all its components were
impacted by concerns relating to coal supply lower in Q1 of 2011-12 than in the
: Despite well-known limitations, expenditure side GDP data are being used as proxies for components of Aggregate Demand.
9
Macroeconomic and Monetary Developments Second Quarter Review 2010-11
10
Aggregate Demand
II.8 In terms of sectoral breakdown, sales of II.9 Early results of 161 companies for Q2 of
manufacturing companies were higher at 25 per 2011-12 suggest that sales growth remains
cent compared to those of IT companies (19 per healthy. With support from other income, the
cent) and companies in the services sector growth in net profits is maintained (Table II.3).
(14 per cent). While profit margins of
Fiscal slippages may complicate the task
manufacturing and non-IT services companies
of aggregate demand management
dipped in Q1 of 2011-12 compared with the
corresponding quarter of last year, it remained II.10 The Central governments key deficit
the same for IT companies. indicators have widened during 2011-12 (April-
2.5
23
2.0
Per cent
Per cent
21
1.5
19
1.0
0.5 17
Q1: 2010-11 Q2: 2010-11 Q3: 2010-11 Q4: 2010-11 Q1: 2011-12
11
Macroeconomic and Monetary Developments Second Quarter Review 2010-11
Table II.3: Early Results for Q2 of 2011-12 Chart II.2: Direct Tax Refunds
2010-11 2011-12 80000
Indicator Q2 Q1 Q2 70000
1 2 3 4 60000
No. of companies 161* 50000
Growth rate (Y-o-Y) in per cent
` crore
40000
Sales 25.0 33.2 27.7
Expenditure 21.2 32.3 33.6 30000
Raw Material 20.4 36.4 39.8
20000
Staff Cost 23.7 29.7 21.3
Power and Fuel 41.3 45.9 22.5 10000
2010-11
2007-08
2006-07
2008-09
2010-11
(Apr-Sep)
2011-12
(Apr-Sep)
2005-06
2009-10
Depreciation 29.5 4.4 1.0
Gross Profits 18.8 25.8 21.8
Interest 22.7 15.6 22.4 Source : Central Board of Direct Taxes, Ministry of Finance, GoI.
Tax Provision 24.6 40.6 33.1
Net Profits 19.2 23.4 22.7
Ratio in per cent growth outcome and its impact on tax revenues
Cost of raw material to Sales 65.2 68.5 68.9 as well as the governments commitment
Staff cost to Sales 8.8 8.3 8.5
Interest to Sales 1.2 1.0 1.2
towards controlling expenditure, especially non-
Interest to Gross Profits 7.2 6.7 7.3 plan revenue expenditure. Although total
Interest Coverage 13.9 14.9 13.6 expenditure growth was lower during 2011-12
Operating Profits to Sales 19.4 17.0 16.6
Gross Profits to Sales 16.5 15.2 15.7 (April-August) than in the corresponding period
Net Profits to Sales 12.0 11.0 11.5 of 2010-11, it remained above the budgeted
* : Of which 117 are manufacturing companies. growth. Furthermore, expenditure pressures
from petroleum subsidies are yet to be fully
August) in comparison with the levels during accounted for in Central government finances
the corresponding period of the previous year. during the year so far. The first instalment of
The deficit continues to be higher during 2011- supplementary demand for grants of the Central
12 (April-August) even when adjusted for government presented in August 2011 did not
receipts from spectrum auctions during 2010- provide for the additional allocation that may
11 (April-August) in excess of the budgeted be required for petroleum subsidies.
amount. The wider fiscal imbalances during the
year so far reflect a sharp deceleration in tax II.12 These expenditure pressures, particularly
revenues. The Centres quarterly analysis of its on the revenue account, could partially offset
own finances attributes the deceleration in tax the impact of demand compression. The
revenue to frontloading of direct tax refunds, previous quarter release of this Report had
aimed at reducing the pendency of claims in cautioned about the likelihood of fiscal slippage
the current year (Chart II.2). The higher in 2011-12. There is a possibility of Central
recovery of loans and decline in capital government missing its disinvestment target,
expenditure, however, contained the which would add to the pressures of achieving
deterioration in gross fiscal deficit (GFD) the budgeted fiscal deficit for 2011-12. The
relative to that in revenue deficit (RD) Central government has announced an
(Table II.4). additional borrowing of nearly `53,000 crore
in the second half of 2011-12, taking into
II.11 Current indications are that the Central account the shortfall in other sources of
governments deficit targets for 2011-12 will financing of fiscal deficit, mainly National
be breached. The fiscal position during the Small Savings Fund (NSSF) and lower than
course of the year will be shaped by the eventual budgeted opening cash balance.
12
Aggregate Demand
Subsidies likely to overshoot budget II.14 Based on the current assessment of under-
estimates recoveries of OMCs for 2011-12 as a whole,
II.13 During 2011-12 (April-August), the expenditure on petroleum subsidies could range
growth in major subsidies, excluding between 0.74 per cent and 0.87 per cent of GDP
compensation to Oil Marketing Companies depending on the extent of burden sharing by
(OMCs) for under-recoveries, was 1.5 per cent the Central government as compared with the
as against a decline budgeted for the year as a budget estimate of 0.26 per cent of GDP for
whole. Non-plan expenditure of the Ministry 2011-12. The subdued growth in revenue
of Petroleum and Natural Gas which includes receipts may pose a risk of spillover of the
compensation to OMCs for under-recoveries current years petroleum subsidy burden to the
registered y-o-y growth of 42 per cent during next year. On the other hand, if the international
the period. According to the Petroleum Planning crude oil prices decline in response to sluggish
and Analysis Cell (PPAC), the under-recoveries global demand, the under-recoveries may be
reported by OMCs for the first half of 2011-12 contained, easing the petroleum subsidy burden.
amounted to `64,900 crore. The per unit under-
recovery on sale of petroleum products has been II.15 There are further upside risks to GFD on
firming up since mid-September 2011, in line account of revenue shortfall for the Centre of
with the weakening of the rupee around 0.29 per cent of GDP due to changes in
notwithstanding some interim decline in global the duty structure of petroleum products.
crude oil prices (Chart II.3). Similarly, there are signs of pressures emerging
13
Macroeconomic and Monetary Developments Second Quarter Review 2010-11
Chart II.3: Under Recoveries of Oil Marketing Companies per Unit of Product
30 390
27
365
24
Price Revision
` per cylinder
21 340
` per litre
18
315
15
12 290
9
265
6
3 240
(effective
June 25)
Apr 2011
Apr 2011
I FN
I FN
May 2011
II FN
June 2011
II FN
June 2011
II FN
June 2011
I FN
I FN
July 2011
II FN
July 2011
I FN
Aug 2011
II FN
Aug 2011
I FN
Sep 2011
IIFN
Sep 2011
I FN
Oct 2011
II FN
Oct 2011
II FN
May 2011
14
Aggregate Demand
contribution to financing State governments this is in line with the near-term policy
GFD. As a result, State governments reliance objective of dampening inflation. Given the
on market borrowings during 2011-12 (April- growth outlook, there is a risk of not meeting
September) was higher than a year ago. The the tax collection target. With oil prices
surplus cash balances of State governments remaining at elevated levels, the subsidy
invested in the Central governments Treasury burden of the Government is expected to be
Bills as on October 14, 2011 were, however, much higher than budgeted. Hence, the process
higher than a year ago. of fiscal consolidation is likely to suffer a
setback. Fiscal slippage would further
Need to rebalance government spending complicate management of aggregate demand.
to support investment A possible crowding out of private investment
II.18 The sharp slowdown in investment can will pose stronger downside risks to growth.
affect growth going forward. Hindrances to This can be addressed by rebalancing
execution of projects and problems relating to government spending from consumption to
land acquisition seem to be affecting investor investment at this critical juncture and by
sentiments. Consumption demand has started putting in place complementary policies to
to fall for interest rate sensitive sectors, but support investment.
15
III. THE EXTERNAL SECTOR
Despite a surge in exports and higher net invisibles receipts, the current account deficit (CAD)
increased during Q1 of 2011-12 reflecting strong import growth on account of higher oil prices
and sharp increase in imports of gold & silver, machinery and electronics. The composition of
capital inflows shifted with a sharp fall in FII inflows and rise in FDI. The uncertainties associated
with the sovereign debt problem in the euro area and the slowdown in the US could pose
challenges for Indias external sector. The external sector outlook, though stable in the baseline
scenario, will require close monitoring with a greater emphasis on encouraging FDI inflows.
Widening CAD poses risks amidst commodities as well as export destinations. The
uncertain global conditions rise in exports was particularly on account of
engineering goods (103 per cent) and petroleum
III.1 Although merchandise export growth
& oil products (53 per cent). However, during
outpaced import growth, CAD surged during
this period, there was a sharp rise in imports as
Q1 of 2011-12 in absolute terms, reflecting
well, which led to the widening of the trade
sharp increase in imports of oil, gold, silver,
deficit. The high growth in imports stemmed
machinery and electronics. The wider CAD was
from an increase in oil imports (42 per cent)
financed comfortably with an improvement in
and non-oil import items, viz., gold and silver
capital flows, particularly on account of a
(80 per cent), machinery (34 per cent),
marked increase in FDI inflows. Going forward,
electronics (33 per cent) and organic and
the external sector is expected to remain
inorganic chemicals (26 per cent). Notably, non-
manageable although the upside risks to CAD
oil trade deficit remained unchanged in nominal
have increased arising from slowing global
terms (Table III.1 and Chart III.1).
economy and debt-related stress in euro area,
in particular. Exports may slowdown ahead in a tougher
Trade deficit widened in spite of high climate
export growth III.3 Indias export growth has shown
III.2 Merchandise exports grew at a higher than unexpected buoyancy in recent months, despite
anticipated rate during April-September 2011 the slowdown in advanced economies (AEs)
reflecting continued diversification in terms of and rising global uncertainty (Table III.2). This,
16
The External Sector
30.0 80
-10.0 10
10.0 60
-12.0 8
-10.0 -14.0 6 40
-16.0 4 20
-30.0
-18.0 2
0
-50.0 -20.0 0
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
May-06
Jul-06
Sep-06
Nov-06
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Exports Growth Imports Growth Trade Balance (RHS) POL Imports Average Price of Indian Basket (RHS)
among others, was a reflection of the continued to 5.8 per cent for 2012. The WTO has lowered
diversification of Indias exports to other its forecast for merchandise trade volume
emerging and developing economies (EDEs) growth to 5.8 per cent in 2011 from its previous
where growth buoyancy was still intact as also estimate of 6.5 per cent.
the domestic trade policies intended to support
Growth in services exports may also
exports. However, the slowing of AEs, with
decelerate
some weakening of growth prospects of EDEs,
may weigh on Indias exports in subsequent III.5 The surplus on account of invisibles
months. continued to finance around 60 per cent of the
merchandise trade deficit in Q1 of 2011-12.
Global trade may decelerate on weakening Within services, export of software services
global demand and rising risk aversion continued to grow in Q1, though at a lower rate
III.4 The growth in global trade has remained than during the previous quarter. Private
volatile reflecting the uncertain global transfers, representing workers remittances
environment (Chart III.2). Both the IMF and from abroad, remained marginally higher in Q1
the WTO have projected a lower growth in than in the corresponding quarter of the previous
world trade volume reflecting weakening global year despite uncertainties in source countries.
demand. The IMF has reduced its earlier The decline in investment income, reflecting
forecast for world goods and services trade from lower interest rates abroad, also impacted the
8.2 per cent to 7.5 per cent for 2011 and further overall net receipts on account of invisibles
17
Macroeconomic and Monetary Developments Second Quarter Review 2010-11
Chart III.2: Growth in World Merchandise Table III.4: Capital Flows in 2011-12 so far
Exports (Value) (US $ billion)
40 25
Component Period 2010-11 2011-12
30 20
15 1 2 3 4
20
10 FDI to India April-August 11.7 21.0
10 5 FIIs (net) April-Oct. 14 27.5 0.6
Per cent
Per cent
0 0 ADRs/GDRs April-August 1.5 0.3
-5 ECB Approvals April-August 7.5 15.9
-10
-10
NRI Deposits (net) April-August 1.9 2.1
-20
-15 FDI : Foreign Direct Investment.
-30 -20 FII : Foreign Institutional Investment.
-40 -25 ECB : External Commercial Borrowings.
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
2011Q1
2006Q3
2007Q3
2008Q3
2009Q3
2010Q3
2006Q2
2007Q2
2008Q2
2009Q2
2010Q2
2011Q2
2006Q4
2007Q4
2008Q4
2009Q4
2010Q4
NRI : Non Resident Indians.
ADR : American Depository Receipts.
GDR : Global Depository Receipts.
Q-on-Q (RHS) Y-on-Y
Source: WTO
low up to October 14, 2011. Volatility in FII
(Table III.3). In the coming quarters, a inflows witnessed in Q2 mainly reflected
slowdown in the US and the euro area may have concerns of a double-dip recession in the US
some impact for exports of invisibles, and a worsening debt crisis in the euro area.
particularly software services, as was evident During Q1 of 2011-12, the surplus on capital
during Q4 of 2008-09 to Q2 of 2009-10. account at US$ 20.9 billion was more than
adequate for financing the higher CAD at US$
Sharp decline in FII flows largely offset
14.5 billion (Table III.5).
by strong FDI flows in Q2 of 2011-12
Overall capital flows to emerging markets
III.6 So far in 2011-12, capital inflows have
entering an uncertain phase
exhibited an uptrend, mainly on account of
robust FDI inflows and rise in external III.7 EDEs are facing a general rise in volatility
commercial borrowings (ECBs) and trade of capital flows with resurfacing of global
credit. FDI inflows were almost double the level downside risks and even the possibility of a
recorded during the corresponding period of reversal of such flows under extreme
2010-11 while ECBs also registered healthy circumstances cannot be ruled out. The
growth (Table III.4). However, net FII inflows possibility of contagion from the euro area
have not only been volatile but also significantly banking system to the EDEs remains high. This
can operate through adverse impact on the
Table III.3: Net Invisibles
balance sheets of the subsidiaries of European
(US $ billion)
Item April-March April-June
banks operating in the EDEs and due to
2009-10 2010-11 2010-11 2011-12 investment funds liquidating their positions
(PR) (P) (PR) (P) because of any losses on assets in AEs. Going
1 2 3 4 5 forward, in context of India, buoyancy in FDI
A. Services 35.7 47.7 9.6 12.1 inflows may continue during the second half of
Of which
Travel 2.5 4.0 0.6 0.1 2011-12, as projects attracting significant FDI
Transportation -0.8 0.4 0.0 0.1 are already in the pipeline. Uncertainty remains,
Software 48.2 56.8 12.5 14.2
Business Services -6.7 -3.8 -1.1 -1.0 however, regarding portfolio flows, which are
Financial Services -0.9 -1.0 -0.2 -0.5 by nature volatile.
B. Transfers (Private) 52.1 53.4 13.1 13.7
C. Income -8.0 -14.9 -2.9 -4.3 Debt creating capital flows also uncertain
Investment Income -7.2 -13.9 -2.6 -4.2 in spite of widening interest rate
Compensation of
employee -0.8 -1.0 -0.3 -0.1 differential
Invisibles (A+B+C) 80.0 86.2 19.8 21.3 III.8 During 2011-12 so far, ECBs registered
P: Provisional. PR: Partially Revised.
healthy growth and NRI deposits also showed
18
The External Sector
marginal increase. The ECB policy was further External vulnerability indicators portray
rationalised and liberalised in September 2011. a mixed picture
The increase in the annual limit for eligible
III.10 Indias external debt stock as at end-June
borrowers under the automatic route may help
2011 showed an increase of US$10.4 billion
in sustaining the uptrend in ECBs in the coming
over the level as at end-March 2011 mainly on
quarters of 2011-12. However, euro imbroglio,
account of ECBs reflecting interest rate
if continues, may affect the availability and cost
differential and short-term trade credit reflecting
of debt creating flows.
surge in imports (Table III.7).
Rupee sees significant nominal and real III.11 The key debt sustainability indicators,
depreciation in Q2 of 2011-12 such as ratio of short-term debt to total external
III.9 Based on narrow as well as broad debt, ratio of short-term debt to reserves, and
currency baskets (i.e., 6, 30 and 36 currency debt service ratio marginally worsened due to
baskets), the Indian rupee depreciated sharply the continued dominance of debt creating flows.
over end-March 2011 both in nominal and real However, other indicators, viz., reserves cover
terms (Table III.6). for imports and debt service payments improved
Table III.6: Nominal and Real Effective Exchange Rates-Trade Based
(Base: 2004-05=100)
(Per cent, appreciation+/depreciation-)
Index Year-on-Year Variation (Average) 2011-12 (P)
Oct. 14, (Oct. 14 over
2011 P 2008-09 2009 10 P 2010- 11 P end-Mar.)
1 2 3 4 5 6
36-REER 99.5 -9.9 -3.1 7.9 -4.1
36-NEER 85.5 -10.9 -2.6 2.9 -8.0
30-REER 92.4 -10.2 -4.6 4.5 -2.0
30-NEER 87.9 -8.4 -2.2 1.1 -7.1
6-REER 109.7 -9.3 -0.3 13.0 -6.3
6-NEER 82.7 -13.6 -3.7 5.6 -9.0
`/USD (Average) 45.3 -12.4 -3.2 4.0 1.7#
`/USD (end-March) 49.1* -21.5 12.9 1.1 -9.1
NEER: Nominal Effective Exchange Rate. REER: Real Effective Exchange Rate. P: Provisional.
*: As on October 18, 2011. #: Apr. Sept. 2011 over Apr. Sept. 2010.
Note: Rise in indices indicates appreciation of the rupee and vice versa.
19
Macroeconomic and Monetary Developments Second Quarter Review 2010-11
during Q1 of 2011-12 (Table III.8). Going volatile international price of crude oil, some
forward, debt flows may increase further due moderation in prices due to downward revision
to persistence of interest rate differentials, in global oil demand in coming period may
higher annual ceiling for ECBs under the provide some relief.
automatic route for corporates in specified
III.13 Trends in capital inflows so far suggest
sectors and liberalisation of investment by
that the economy has received sufficient flows
FIIs in corporate bonds for the infrastructure
to finance CAD during the first half of 2011-
sector.
12. Although there has been a marked decline
External sector outlook, although stable, in net FII flows, a significant pick up in FDI
warrants close monitoring inflows augurs well from the sustainability point
III.12 With progressive diversification both in of view. Going forward, capital flows into India
terms of commodities as well as destinations, will depend on how the economic and financial
exports during the year so far (up to September conditions in AEs, particularly the US and the
2011) have grown faster than imports and net euro area, evolve during the second half and
services also continue to grow albeit at moderate whether relative growth and interest rate
pace. However, owing to increasing uncertainty differential would suffice to outweigh the
in growth prospects of US and European general risk perception among foreign investors.
economies, the growth momentum in exports It is, therefore, important to encourage FDI
seen so far may not be sustained and growth in inflows to impart stability to Indias capital
services exports may also remain moderate in account. Overall, the balance of payments
the coming months. While uncertain global outlook for 2011-12, although stable, warrants
economic and financial prospects underpinned close monitoring.
20
IV. MONETARY AND LIQUIDITY CONDITIONS
In the Q2 of 2011-12, liquidity conditions continued to remain in deficit mode, in line with the
policy objective of the Reserve Bank. Base money decelerated as currency growth moderated.
Money (M3) growth, however, accelerated moderately as the money multiplier increased. While
credit growth is above the indicative trajectory, it will moderate as growth decelerates. Going
forward, the global uncertainty and fiscal pressures pose challenges to effective monetary
policy management.
Significant monetary tightening in the policy rate and inflation presently are broadly
face of high inflation comparable to the levels prevailing in
September 2008 (Chart IV.1).
IV.1 The Reserve Bank has been pursuing a
tight monetary policy stance since early 2010 Liquidity remained in deficit mode
in response to sustained inflationary pressures. IV.2 The average LAF injection, which was
Inflation, which initially emerged from supply around `49,000 crore in the first quarter of
side constraints, increasingly became 2011-12, dropped marginally to around `47,000
generalised and the Reserve Bank had to crore in the second quarter of 2011-12 mirroring
calibrate its policy response to anchor inflation the increase in centres cash deficit. Liquidity
expectations, while at the same time ensuring deficit largely remained within (+/-) 1 per cent
that the growth impulses of the economy were of NDTL of the banks, in line with the stated
not hampered. In continuation of this policy policy objective of the Reserve Bank. The
stance, the Reserve Bank raised the policy repo liquidity deficit, which had witnessed some
rate by 50 bps in July 2011 and again by 25 bps stress in June 2011 due to quarterly advance
in September 2011 (Table IV. 1). The level of tax payouts, eased in early July 2011, reflecting
21
Macroeconomic and Monetary Developments Second Quarter Review 2010-11
8 1,60,000
9.00 15.0
7.00 1,00,000
Per cent
Per cent
5
5.0
80,000
6.00 4
0.0 60,000
3
5.00
40,000
2
4.00 -5.0
20,000
1
3.00 -10.0 0
0
May-20-11
Jan-14-11
Feb-25-11
Apr-08-11
Jul-01-11
Aug-12-11
Sep-23-11
Apr -11-08
May-23-08
Jul-04-08
Aug-15-08
Sep-26-08
Nov-07-08
Dec-19-08
Jan-30-09
Mar-13-09
Apr-24-09
Jun-05-09
Jul 17-09
Aug-28-09
Oct-09-09
Nov-20-09
Jan-01-10
Feb -12-10
Mar-26-10
May-07-10
Jun-18-10
Jul-30-10
Sep -10-10
Oct-22-10
Dec-03-10
Jan-11
Feb-11
Mar-11
May-11
Jun-11
Aug-11
Apr-08
May-08
Jun-08
Aug-08
Sep-08
Oct-08
Dec-08
Jan-09
Mar-09
Apr-09
May-09
Jul-09
Aug-09
Sep-09
Nov-09
Dec-09
Feb-10
Mar-10
Apr-10
Jun-10
Jul-10
Aug-10
Oct-10
Nov-10
Repo Rate Reverse Repo Rate WPI (RHS) IIP (RHS) Repo Reverse Repo CRR MSS (RHS)
the drawdown of Central Government cash window to the afternoon slot is to encourage
balances and transition to WMA/OD (Chart IV.2 the market participants to trade amongst
and Table IV.2). Since the introduction of the themselves and to park any surplus with the
new operating procedures of monetary policy Reserve Bank only after exhausting all other
in May 2011, injection of liquidity under the avenues to deploy the funds in the money market.
marginal standing facility (MSF) has been Base money growth slows, reflects
limited to two occasions (`100 crore on June moderation in currency expansion
10 and `4,105 crore on July 15, 2011), which is
IV.4 The decelerating trend of base money
indicative of the liquidity position not getting
since December 2010 continued during the
over tight.
second quarter of 2011-12 mainly on account
IV.3 While repo auctions under LAF of an absence of significant injection of primary
continued to be conducted between 9.30 am and liquidity by the Reserve Bank. While moderate
10.30 am, the Reserve Bank decided to shift amount of liquidity was injected through LAF
the reverse repo auctions under LAF and MSF operations, no significant primary liquidity was
operations to the afternoon time slot of 4.30 pm injected either by way of outright purchases of
to 5.00 pm on all working days (excluding G-Sec or forex operations. In addition, currency
Saturdays) with effect from August 16, 2011. growth, which had witnessed significant
The prime reason for shifting the reverse repo acceleration and remained above money supply
1,30,000
80,000
` crore
30,000
-20,000
-70,000
-1,20,000
Jan-03-11
Jan-31-11
Feb-28-11
Mar-28-11
Apr-25-11
May-23-11
Jun-20-11
Jul-18-11
Aug-15-11
Sep-12-11
Oct-10-11
Mar-29-10
Apr-26-10
May-24-10
Jun-21-10
Jul-19-10
Aug-16-10
Sep-13-10
Oct-11-10
Nov-08-10
Dec-06-10
22
Monetary and Liquidity Conditions
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
December -1,13,415 0 1,44,437 31,022
2011 Currency (Seasonally Time deposit (seasonally
January -76,730 0 1,18,371 41,641 adjusted) adjusted)
February -72,005 0 77,397 5,392
March* -1,06,005 0 16,416 -89,589
April -39,605 0 -35,399 -75,004 Growing endogeneity of money keeps
May -75,795 0 -9,544 -85,339
June -96,205 0 8,339 -87,866 money supply above trajectory
July -48,555 0 -25,983 -74,538
August -49,215 0 -21,192 -70,407 IV.5 While the base money growth has
September -82,645 0 -24,387 -1,07,032
October (on 14th) -54,270 0 -32,883 -87,153 decelerated sharply, the money supply growth
@ : Excludes minimum cash balances with the Reserve Bank in accelerated moderately as the money
case of surplus.
* : Data pertain to March 31 multiplier rose (Table IV.3 and Chart IV.4). This
Note: 1. Negative sign in column 2 indicates injection of liquidity divergent trend in base money and broad money
through LAF.
2. Negative sign in column 4 indicates WMA /OD availed arises out of increasing endogeneity of money
by the Central Government.
supply as banks respond to strong credit
growth for most part of 2010-11, has also been demand, which is met through recourse to
decelerating since the first quarter of 2011-12 additional borrowings, including that from the
which moderated the base money expansion. central bank.
The increase in term deposit interest rates since
Robust deposit growth
September 2010 prompted a switch from
currency holdings and demand deposits to time IV.6 Deposits registered robust growth since
deposits (Chart IV.3). December 2010 due to successive hikes in
23
Macroeconomic and Monetary Developments Second Quarter Review 2010-11
Chart IV.4: Base Money Growth vis-a-vis the Reserve Bank in the July 2011 review,
Broad Money Growth mainly due to high nominal GDP growth.
28 5.30
24
Mar-11-11
Apr- 22-11
Jun-03-11
Jul-15-11
Aug 26-11
Oct-07-11
May- 21-10
Apr-09-10
Jul-02-10
Aug -13-10
Sep-24-10
Nov-05-10
Dec-17-10
18 15.0
11
15
10.0
Per cent
12 9
5.0
9
7
6 0.0
3
5
-5.0
0
Feb-11
Apr-11
Jun-11
Aug-11
Apr-09
Jun-09
Aug-09
Oct-09
Dec-09
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
-3 3 -10.0
May-08-09
Jun-19-09
Jul-31-09
Sep-11-09
Oct-23-09
Dec-04-09
Jan-15-10
Feb-26-10
Apr-09-10
May-21-10
Jul-02-10
Aug-13-10
Sep-24-10
Nov-05-10
Dec-17-10
Jan-28-11
Mar-11-11
Apr-22-11
Jun-03-11
Jul-15-11
Aug-26-11
Oc-07-11
24
Monetary and Liquidity Conditions
35 30
29
28
25 27
20 26
15 25
24
10
23
Jan-14-11
Feb-11-11
Mar-11-11
Apr-8-11
May-6-11
Jun-3-11
Jul-1-11
Jul-29-11
Aug-26-11
Sep-23-11
5
Apr-9-10
May-7-10
Jun-4-10
Jul-2-10
Jul-30-10
Aug-27-10
Sep-24-10
Oct-22-10
Nov-19-10
Dec-17-10
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
Fortnight SLR maintenance LAF-adjusted SLR maintenance
2009-10 2010-11 2011-12 SLR mandated
Fortnight
IV.13 Real lending interest rates have remained
2009-10 2010-11 2011-12 positive, but low and supportive of growth in
the recent period (Chart IV.9). Despite monetary
Chart IV.8 : Aggregate Deposits and Bank Credit
25.0 10.0
Y-o-Y growth in per cent
23.0 8.0
Y-o-Y growth in per cent
21.0 6.0
19.0 4.0
2.0
17.0
0.0
15.0
-2.0
13.0 -4.0
11.0 -6.0
9.0 -8.0
7.0 -10.0
Feb-11-11
Mar-25-11
May-6-11
Jun-17-11
Jul-29-11
Sep-9-11
Apr-10- 09
May- 22-09
July -3-09
Aug-14-09
Sep-25-09
Nov-6-09
Dec-18-09
Jan-29-10
Mar-12-10
Apr-23-10
Jun-4-10
Jul-16-10
Aug-27-10
Oct-8-10
Nov-19-10
Dec-31-10
Divergence between growth rate of credit and deposit (RHS) Aggregate Deposits Bank Credit
25
Macroeconomic and Monetary Developments Second Quarter Review 2010-11
tightening, real interest rates have fallen due to through LAF transactions, broad money
high inflation. growth has stayed above the indicative
trajectory, operating on the impetus
Monetary overshooting a risk in the face
provided by the endogenous factors like strong
of fiscal pressures
credit growth and high deposit growth,
IV.14 Credit growth has remained strong bolstered by substitution from currency
notwithstanding the successive interest rate to deposits. Going forward however,
hikes. As a result, even though there has been credit growth could moderate as growth
only moderate injection of primary liquidity decelerates and inflation moderates. However,
Table IV.5: Credit Flow from Scheduled Commercial Banks
(Amount in Rupees crore)
Item Outstanding as Variation (y-o-y)
on October As on Oct 8, 2010 As on Oct 7, 2011
7, 2011 Amount Per cent Amount Per cent
1 2 3 4 5 6
1. Public Sector Banks 30,38,986 4,24,615 19.8 4,70,704 18.3
2. Foreign Banks 2,21,422 17,923 11.4 45,898 26.1
3. Private Banks 7,86,334 1,25,973 24.5 1,45,213 22.6
4. All Scheduled Commercial Banks* 41,48,598 5,84,064 20.2 6,75,538 19.5
Note: 1. Data as on October 7,2011 are provisional.
2. *Including Regional Rural Banks.
26
Monetary and Liquidity Conditions
even with some deceleration expected in remains a challenge in face of large market
credit growth, containing monetary growth borrowing.
Chart IV.9 : Real Rate of Interest on Demand Loans and Term Loans
a: Real Rates on Demand Loans b: Real Rates on Term Loans
12 12
10 10
8 8
Per cent
Per cent
6 6
4 4
2 2
0 0
Mar-11
Jun-11
Mar-08
Jun-08
Sep-08
Dec-08
Mar-07
Jun-07
Sep-07
Dec-07
Mar-09
Jun-09
Sep-09
Dec-09
Dec-06
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Mar-08
Jun-08
Sep-08
Dec-08
Mar-07
Jun-07
Sep-07
Dec-07
Dec-06
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Real rates on demand loans (based on WPI Mfg. inflation) Real rates on term loans (based on WPI Mfg. inflation)
Real rates on demand loans (based on WPI inflation) Real rates on term loans (based on WPI inflation)
8.0
6.0
6.0
4.0
4.0
2.0
2.0
0.0
2000-01
2010-11
2002-03
2004-05
2007-08
2006-07
2008-09
2001-02
2005-06
2003-04
2009-10
0.0
2000-01
2010-11
2002-03
2004-05
2007-08
2006-07
2008-09
2001-02
2005-06
2003-04
2009-10
-2.0
27
V. FINANCIAL MARKETS
Indian equity and foreign exchange markets, unlike the debt and money markets, showed greater
volatility in Q2 of 2011-12 than in the previous quarter. This mainly reflected risk aversion
arising out of the deepening euro area sovereign debt crisis. Going forward, domestic growth
and inflation outlook, resilience of the banking sector and the nature and depth of global
uncertainty will shape the developments in the financial markets. The global markets will
primarily track the international policy actions to address the problem of euro area sovereign
debt crisis and slowdown in advanced economies (AEs).
Risk aversion, volatility back in global economic activity and weakening financial
markets driven by sovereign debt crisis systems.
V.1 The downgrade of US sovereign debt
Debt overhang causing significant
rating by S&P and deteriorating sovereign debt
spillover risks
problems in the euro area resulted in renewed
volatility in global financial markets during Q2 V.2 There is a growing threat that financial
of 2011-12. The credit default swaps (CDS) stability concerns would get transmitted to the
spreads of stressed euro area economies like real economy as sovereign debt problems
Portugal, Italy and Greece widened since translate into a deterioration of the balance
August 2011, reflecting market perception of sheets of banks holding these sovereign bonds,
worsening sovereign debt sustainability of these mainly in Europe. The stocks of European
economies. AAA rated sovereigns, such as banks, particularly those with high exposure to
Germany and France, were also impacted in the the sovereign debt issued by the periphery
absence of credible measures to contain the countries, faced broad-based sell-offs. The CDS
pervasive impact of the worsening sovereign spreads of banks widened to levels higher than
crisis (Chart V.1). Several periphery and core those during the US sub-prime crisis, partly
European countries including Italy and Spain reflecting the risk perception arising from lack
were downgraded by the credit rating agencies of progress in deleveraging in euro area banks
following the debt concerns, slackening (Chart V.2).
Basis points
Basis points
800
125
3000
600
100
400 2000
75
200 1000 50
0 0 25
Apr-01-11
Apr-15-11
Apr-29-11
May-13-11
May-27-11
Jun-10-11
Jun-24-11
Jul-08-11
Jul-22-11
Aug-05-11
Aug-19-11
Sep-02-11
Sep-16-11
Sep-30-11
Oct-14-11
Apr-01-11
Apr-22-11
May-13-11
Jun-03-11
Jun-24-11
Jul-15-11
Aug-05-11
Aug-26-11
Sep-16-11
Oct-07-11
28
Financial Markets
Basis points
collapse 160
200 60
Index
Index
140
150 40
120
100
100 20
50
80 0
0
Apr-07-11
Apr-26-11
May-15-11
Jun-03-11
Jun-22-11
Jul-11-11
Jul-30-11
Aug-18-11
Sep-06-11
Sep-25-11
Oct-14-11
Jan-31-11
Mar-17-11
May-01-11
Jun-15-11
Jul-30-11
Sep-13-11
Apr-01-08
May-16-08
Jun-30-08
Aug-14-08
Sep-28-08
Nov-12-08
Dec-27-08
Feb-10-09
Mar-27-09
May-11-09
Jun-25-09
Aug-09-09
Sep-23-09
Nov-07-09
Dec-22-09
Feb-05-10
Mar-22-10
May-06-10
Jun-20-10
Aug-04-10
Sep-18-10
Nov-02-10
Dec-17-10
Euro Stoxx Bank Index EUR Libor - OIS Spread (RHS)
Note: 1. The markit iTraxx Europe Senior financial index comprises 25 equally weighted credit default swaps on investment grade European entities.
2. The Euro Stoxx Banks Index is a capitalisation weighted index, which includes countries participating in the European Monetary Union that
are involved in the banking sector.
Source: Bloomberg.
Debt resolution deadlock adds to market V.4 Reacting to the growing uncertainties in
uncertainties the policy outlook, global financial markets
V.3 One of the main policy tools to deal with declined despite an assurance in the euro area
the 2008 crisis was fiscal stimulus. AEs raised summit (July 2011) to increase the flexibility
public expenditure and pared down some tax of the European Financial Stability Facility
burden expecting thereby to boost private (EFSF). That assurance failed to inspire
demand. Nonetheless, reflecting deleveraging confidence underlining the challenge of keeping
by households, tight bank lending and deflation a monetary union intact even without a fiscal
in house prices, private demand decelerated, union. The policy announcement by the US Fed
muting the fiscal multiplier. Presently, while to keep the longer-term interest rates low
unemployment continues to remain at elevated through its maturity extension programme
levels, the option of fiscal stimulus is largely (operation twist) on September 21, 2011 has
unavailable on account of concerns over debt received limited response so far.
sustainability. The governments of AEs are
Search for safe heaven assets continues
striving to find a balance between the need for
a fiscal stimulus in the short-term against V.5 There has been a shift in investor
sustainable fiscal adjustment in the medium- preference towards perceived safe haven assets
term. (Chart V.3). This has triggered global selloffs
Chart V.3: Flight from Stocks to Sovereign Bonds and Safe Assets
4.00
a:Government Bond Yields (10 Year) 8.80 2000
b: Commodity Market Movements 130
1900 125
3.50 8.60
1800
US$ per Troy Ounce
120
US$ per barrel
3.00 8.40
Per cent
1700
Per cent
115
1600
2.50 8.20
110
1500
2.00 8.00
1400 105
Apr-22-11
May-13-11
Jun-03-11
Jun-24-11
Jul-15-11
Aug-05-11
Aug-26-11
Sep-16-11
Oct-07-11
Apr-01-11
Apr-22-11
May-13-11
Jun-03-11
Jun-24-11
Jul-15-11
Aug-05-11
Aug-26-11
Sep-16-11
Oct-07-11
29
Macroeconomic and Monetary Developments Second Quarter Review 2010-11
0.60 70
markets since September 2011 (Chart V.5a).
Apr-01-2011
Apr-15-2011
Apr-29-2011
May-13-2011
May-27-2011
Jun-10-2011
Jun-24-2011
Jul-08-2011
Jul-22-2011
Aug-05-2011
Aug-19-2011
Sep-02-2011
Sep-16-2011
Sep-30-2011
Oct-14-2011
V.8 In line with the global markets, the Indian
equity prices continued their declining trend in
Swiss Franc/US$
Source: Bloomberg.
Euro/US$ Yen/US$ (RHS)
Q2 of 2011-12. The rise in equity indices at the
beginning of Q2 due to FII inflows could not
in the equity markets and portfolio rebalancing sustain the momentum owing to global
in favour of gold as a safe asset has caused developments and net sales by FIIs ensued. The
gold prices to touch a historical high of two key Indian equity indices, Sensex and Nifty,
US $1900 per troy ounce on September declined (y-o-y) by about 14.5 per cent and 14.7
5, 2011. The slowdown in growth of AEs led per cent, respectively, as on October 19, 2011.
to the decline in the crude oil prices in the Nonetheless, the decline in Indian equity
quarter. markets was relatively less than that in many
emerging and developing economies (EDEs).
V.6 International currency markets turned P-E ratio of Indian equities remained higher
volatile during Q2 of 2011-12. The US dollar than other EDEs as at end September 2011
appreciated vis-a-vis the euro (Chart V.4). (Table V.1, V.2 and Chart V.5b).
Table V.1: Stock Price Movement and P/E Ratios in EDEs and AEs
Stock Price Variations (Per cent) P/E- Ratios
Items End-Mar End-Mar End-Sep End-Mar End-Mar End-Sep
2010@ 2011@ 2011* 2010 2011 2011
1 2 3 4 5 6 7
Brazil (Bovespa) 72.0 -2.5 -23.7 16.4 10.9 8.0
China (Shanghai Composite) 31.0 -5.8 -19.4 23.1 16.3 12.6
India (BSE Sensex) 80.5 10.9 -15.4 17.7 17.6 17.9
Indonesia (Jakarta Composite) 93.7 32.5 -3.5 13.6 16.9 16.1
Malaysia (KLCI) 51.4 17.0 -10.2 18.9 17.0 14.8
Russia (RTS) 128.0 30.0 -34.4 9.8 8.4 5.1
Singapore (Straits Times) 69.9 7.6 -13.9 13.4 10.3 7.4
South Korea (KOSPI) 40.3 24.4 -16.0 12.2 13.8 12.3
Taiwan (Taiwan Index) 52.0 9.6 -16.8 19.1 15.7 13.8
Thailand (SET Composite) 82.6 32.9 -12.5 12.4 13.3 11.1
France (CAC 40) 41.6 0.4 -25.3 15.2 11.9 8.6
FTSE 100 44.7 4.0 -13.2 15.6 14.4 10.0
FTSE EUROTOP 100 44.8 13.3 -17.3 14.2 12.6 9.7
Germany (DAX) 50.6 14.4 -21.9 17.5 12.8 9.8
Hong Kong (Hang Seng) 56.5 10.8 -25.2 15.2 12.0 8.1
Japan (Nikkei) 36.8 -12.0 -10.8 39.1 17.9 16.3
United States of America (S&P 500) 46.6 13.4 -14.7 17.1 15.1 12.4
@: Year-on-year variation. *: Variation over end-March 2011.
Source: Bloomberg.
30
Financial Markets
Per cent
-10
-15
-20
-25
-30
-35
Brazil
India
Russia
China
Malaysia
Indonesia
South
Korea
Conditional variance of Nifty returns for the period Apr 2010 - Oct 2011
31
Macroeconomic and Monetary Developments Second Quarter Review 2010-11
` Thousand crore
` Thousand crore
15000
500
` crore
Index
10000 2000
10000
400
5000 5000
1500
300
0 0
1000
-5000 200
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
FII Investment Mutual Fund Investment
Average BSE Sensex (RHS)
Source: SEBI, BSE, NSE. Cash Segment Derivative Segment FII investment in
Note: Data for FII investment in derivatives are available from December 2009. Derivatives (RHS)
12 for effective monetary policy transmission. Chart V.7: Movements in Bank CDS spreads
Against the backdrop of tight liquidity 500 120
Basis points
Basis points
350 80
The call rate generally hovered around the S&P downgrades
70
300 US credit rating
policy (repo) rate during Q2. 60
250
The money market remained orderly without 50
Table V.3: Resource Mobilisation from per cent of the overnight money market volume
Capital Market and constitutes the bulk of money market.
(` crore)
Reflecting active market conditions, the
Category 2010-11 2010-11 2011-12
(Apr-Mar) (Apr-Sep) (Apr-Sep) transaction volumes in this segment remained
1 2 3 4 high. Banks and primary dealers continued to
A. Prospectus and
Rights Issues* 37,620 14,057 11,684P Chart V.8: Movements in Money Market Rates
1. Private Sector (a+b) 24,373 13,475 7,106
a) Financial 3,877 3,420 901
b) Non-financial 20,496 10,054 6,205 8.5
6.5
B. Euro Issues 9,441 7,443 1,783
C. Mutual Fund
4.5
Mobilisation(net)@ -49,406 -452 55,280
1. Private Sector -19,215 18,744 52,451 2.5
2. Public Sector # -30,191 -19,196 2,829
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
32
Financial Markets
be the most significant borrowers, while the 12 (up to August) as compared to that of the
MFs continued as the major group of lenders previous quarter. Leasing and finance and
followed by banks in this segment. However, manufacturing companies continued to be the
the share of MFs in the total lending declined major issuers of CPs.
significantly to below 50 per cent in Q2. V.16 Primary yields on Treasury Bills (TBs)
firmed up consistent with the spurt in overnight
V.14 In the absence of credit funding pressures
rates during Q2 of 2011-12 (Table V.6). The
and given reasonable retail deposit mobilisation
upward movement in rates reflected the
in Q2, banks issuance of certificates of deposits
marked increase in Government short-term
(CDs) declined. Consequently the rate of
borrowing through issuance of TBs and cash
interest on CDs declined.
management bills (CMBs) to finance
V.15 The average fortnightly issuance of unanticipated cash-flow mismatches coupled
commercial paper (CP) declined in Q2 of 2011- with tight liquidity conditions.
Table V.5: Average Daily Volumes in Domestic Financial Markets
(` crore)
Money Market Bond Market Forex Stock
Market Market#
LAF Call Market CBLO Commercial Certificates G-Sec@ Corporate Inter-bank
Money Repo Paper* of Deposit* Bond (US$ mn)
1 2 3 4 5 6 7 8 9 10 11
Mar-10 37,640 8,812 19,150 60,006 75,506 3,41,054 6,621 1,598 16,082 9,191
Mar-11 -80,963 11,278 15,134 43,201 80,305 4,24,740 8,144 1,314 22,211 7,276
Apr-11 -18,809 13,383 14,448 56,160 1,24,991 4,47,354 6,928 1,053 25,793 8,277
May-11 -54,643 10,973 15,897 40,925 1,21,221 4,33,287 7,356 691 24,167 6,668
Jun-11 -74,125 11,562 16,650 41,313 1,04,689 4,23,767 12,844 1,168 24,047 6,404
Jul-11 -43,759 11,513 11,748 41,006 1,33,691 4,12,189 10,560 1,208 22,525 6,889
Aug-11 -40,712 11,290 14,793 39,131 1,48,812 4,05,685 15,737 1,266 23,279 6,870
Sep-11 -55,920 13,782 13,893 45,119 3,86,470$ 12,320P 1,069 22,384 6,896
*: Outstanding position. @: Average daily outright trading volume in Central Government dated securities.
#: Volumes in BSE and NSE (cash segment). $: As on Sep 9, 2011. P: Provisional.
Note: In col. 2, (-) ve sign indicates injection of liquidity while (+) ve sign indicates absorption of liquidity.
33
Macroeconomic and Monetary Developments Second Quarter Review 2010-11
Table V.6: Treasury Bills in the Table V.7: Issuances of Central and
Primary Market State Government Dated Securities
Year/ Notified Average Implicit Yield at Item 2009-10 2010-11 2011-12*
Month Amount Minimum Cut-off Price (Per cent) 1 2 3 4
(` crore) 91-day 182-day 364-day Central Government
1 2 3 4 5 Gross amount raised (` crore) 4,51,000 4,37,000 2,78,000
Devolvement on Primary
2009-10 3,80,000 3.57 3.97 4.38
Dealers (` crore) 7,219 5,773 7,168
2010-11 3,03,000 6.18 6.48 6.56 Bid-cover ratio (range) 1.44-4.32 1.39-3.88 1.39-3.20
Apr-11 30,000 7.32 7.60 7.65 Weighted average maturity (years) 11.16 11.62 12.20
May-11 44,000 8.05 8.24 8.25 Weighted average yield (per cent) 7.23 7.92 8.40
Jun-11 53,000 8.21 8.19 8.32
State Governments
Jul-11 40,000 8.21 8.23 8.34
Gross amount raised (` crore) 1,31,122 1,04,039 76,956
Aug-11 40,000 8.35 8.43 8.24 Cut-off yield range (per cent) 7.04-8.58 8.05-8.58 8.36-9.09
Sep-11 50,000 8.41 8.42 8.40 Weighted average yield (per cent) 8.11 8.39 8.67
Oct-11* 16,000 8.46 8.62 8.52
*: Up to October 18, 2011.
*: Up to October 18, 2011.
Basis points
8.6 110
Per cent
8.5 8.5
90
8.4
8.0
8.3 70
8.2 7.5 50
8.1
Term in years 7.0 30
8.0
Jan-10-2011
Feb-14-2011
Mar-21-2011
Apr-25-2011
May-30-2011
Jul-04-2011
Aug-08-2011
Sep-12-2011
Oct-17-2011
Apr-05-2010
May-10-2010
Jun-14-2010
Jul-19-2010
Aug-23-2010
Sep-27-2010
Nov-01-2010
Dec-06-2010
1
11
21
3
13
23
5
15
25
8
18
28
7
2
17
12
19
27
29
6
16
22
26
4
10
14
20
24
30
34
Financial Markets
in comparison to some of the EDEs, V.21 The average daily turnover in the
the depreciation in the Indian rupee merchant segment as well as interbank segment
during Q2 of 2011-12 has been less stark of the forex market was lower than that in the
(Chart V.10b). preceding quarter. The volume in value terms
55
70 -6
50
65 -9
45 -11
60
-14
40 55
-16
Indian Rupee
Russian Ruble
Brazilian Real
Chinese Yuan
Indonesian Rupiah
Korean Won
Malaysian Ringgit
Thai Baht
Singapore Dollar
Jan-10-11
Feb-14-11
Mar-21-11
Apr-25-11
May-30-11
Jul-04-11
Aug-08-11
Sep-12-11
Oct-17-11
Apr-05-10
May-10-10
Jun-14-10
Jul-19-10
Aug-23-10
Sep-27-10
Nov-01-10
Dec-06-10
` crore
8000
40000
20000 4000
0 0
Feb-05-11
Apr-05-11
Jun-05-11
Aug-05-11
Oct-05-11
Apr-05-10
Jun-05-10
Aug-05-10
Oct-05-10
Dec-05-10
35
Macroeconomic and Monetary Developments Second Quarter Review 2010-11
160 150
120
130
90
100
60
70 30
Q1: 2010-11 Q2:2010-11 Q3:2010-11 Q4:2010-11 Q1:2011-12 Q1: 2010-11 Q2: 2010-11 Q3: 2010-11 Q4: 2010-11 Q1:2011-12
Delhi Mumbai Kolkata Chennai* Bengaluru Ahmedabad Lucknow All India**
* : Chennai indices comprise of both residential and commercial properties.
** : All India index is weighted average of city indices, weights based on population proportion.
Source: Department of Registration and Stamps (DRS) of the respective State governments.
in the currency derivative market - both options has been a rise in housing prices and fall in
and futures - which increased up to August 2011, housing transactions in Q1 of 2011-12 in six
showed some deceleration in September 2011 cities, barring Chennai.
(Chart V.10c).
More financial volatility likely ahead
Housing prices rise amidst falling
V.24 The Indian financial markets will
transaction volumes in Q1 of 2011-12
continue to be conditioned by the evolving
V.22 Despite falling volumes, property prices, macroeconomic developments, both global and
as captured by the Reserve Banks Quarterly domestic. Weak outlook for the US economy,
House Price Index (HPI), firmed up in Q1 of and possible spillover effect from global
2011-12. The price index increased by about 8 contagion of the euro area crisis through the
per cent for the second successive quarter at an extremely interconnected European banking
all-India level, while the transactions volume and financial market channel, among others,
index that had fallen sharply in Q2 and Q3 of pose near-term risks to the financial markets.
2010-11 dipped by about 7 per cent in Q1 of Persistence of domestic inflation with a
2011-12 negating the increase in the preceding plausible moderation in growth could impact
quarter. corporate earnings, which may affect equity
V.23 House prices increased in five of the valuations. On the other hand, with substantial
seven major cities on a quarter-over-quarter correction having occurred and limited
basis in Q1 of 2011-12, but declined in Kolkata investment opportunities globally, markets
and remained flat in Chennai (Chart V.11a). could see a recovery. However, the asset quality
On the other hand, the data on volume of of Indian banking sector, the risk exposure and
transactions show that the number of the challenge of public sector bank
transactions have fallen in six cities, except recapitalisation in the face of fiscal pressures
Kolkata (Chart V.11b). On a y-o-y basis, there are issues which require attention.
36
VI. PRICE SITUATION
Inflation continued to be high, generalised and above the comfort level of the Reserve Bank in
the first half of 2011-12. Upside risks to inflation path could result from exchange rate pass-
through of recent rupee depreciation and incomplete transmission of earlier rise in global
commodity prices. Persistent supply shocks in an environment of buoyant demand have
contributed to both generalisation of the inflation process and the sticky inflation path. The
impact of anti-inflationary monetary policy measures taken so far may moderate domestic demand
thereby reducing the upside risks to inflation.
Upside risks to global inflation persist Global commodity prices ease but levels
despite weaker global growth outlook remain high
VI.1 The substantial increase in commodity VI.3 Global commodity prices have softened
prices witnessed since early 2009 has fed into somewhat during 2011-12 from the high levels
domestic inflation of major economies and reached towards the end of 2010-11. This has
inflation exhibited uptrend across both been driven by concerns over sustainability of
developed and emerging economies. The recent demand in the wake of sovereign debt
moderation in commodity prices on the back of concerns in the advanced economies as well as
improved supply prospects in key agricultural
weakening global growth prospects is expected
products. Crude oil prices moderated on the
to have limited softening impact on inflationary
back of International Energy Agency (IEA)
pressures, especially in emerging and
member countries agreeing to release 60 million
developing economies (EDEs). In September
barrels of oil in July 2011 and projected
2011, the IMF revised upwards the projection
moderation in demand growth (Chart VI.1).
of inflation for EDEs to 7.5 per cent for 2011
Global metal prices have also declined
(from 6.9 per cent earlier projected in June somewhat in recent months due to increasing
2011), while for advanced economies (AEs) it worries about the impact of slowing economic
was kept unchanged at 2.6 per cent. growth on metal demand.
VI.2 AEs largely persist with their VI.4 Global food prices reached their
expansionary stance of monetary policy, with historical peak in early 2011 and have
the US Fed providing clear guidance on the moderated somewhat during recent months as
future stance of monetary policy up to 2013. global supply prospects have improved in key
Renewed concerns over the sluggishness of agricultural commodities. However, the prices
global recovery has led to most central banks continue to rule at significantly high levels.
of advanced economies keeping their policy Rising income, diversification of dietary
rates at near zero/very low levels, while EDEs patterns, attraction of bio-fuel as an alternative
have gradually tightened monetary policy to source of energy and weather disturbances
contain inflationary pressures (Table VI.1). impacting supply situation are the major factors
However, some of the EDEs which faced a that contribute to market tightness.
surge in capital inflows due to higher interest VI.5 The World Bank projections on
rates responded by lowering policy rates as commodity prices for the 2011 and 2012
excessive capital inflows also entailed the risk indicate that despite softening, prices could be
of inflation. significantly higher in 2011 and 2012 as
37
Macroeconomic and Monetary Developments Second Quarter Review 2010-11
compared to 2010 levels and the projected levels VI.6 As yet, incomplete pass through of past
are almost closer to the peaks seen in 2008. This price increases is another important risk
indicates that the pressure from global factor from imported inflation. A comparative
commodity prices may persist and the recent position of the movement of different
marginal softening of prices could only dampen commodity prices since the trough they hit
the magnitude of price pressures. during early 2009 indicates that the domestic
430
Index 2002-04=100
260
380
Index: 2005=100
330
210
280
160 230
180
110
130
60 80
Jan-11
Apr-11
Jul-11
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Feb-11
Apr-11
Jun-11
Aug-11
Apr-08
Jun-08
Aug-08
Oct-08
Dec-08
Feb-09
Apr-09
Jun-09
Aug-09
Oct-09
Dec-09
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
IMF Primary Commodity Price Index Food Food Price Index Meat Dairy
Metals Crude Oil Cereals Edible Oils Sugar
38
Macroeconomic Outlook
Chart VI.2: Net Position by Non-commercial Traders in Commodity Futures Market and Futures Prices
250
120 70 110
200
100 60
USD/bb1
100
USD/bbl
150 50
80
100 40 90
60
50 30 80
0 40 20
70
20 10
-50
0 60
-100 0
Jun-11
Jun-11
Jul-11
Jul-11
Aug-11
Aug-11
Aug-11
Sep-11
Sep-11
Oct-11
Jan-11
Apr-11
Jul-11
Oct-11
Jan-08
Apr-08
Jul-08
Oct-08
Jan-07
Apr-07
Jul-07
Oct-07
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
c: Copper d: Soyabean
40 500 250 1800
30 450 1600
200
400
Contracts (Thousands)
Contracts (Thousands)
1400
20
350 150
1200
10 300
USD/bu
USD/lb
100 1000
0 250
50 800
-10 200
600
150 0
-20 400
100
-30 -50 200
50
-40 0 -100 0
Jan-11
Apr-11
Jul-11
Oct-11
Jan-11
Apr-11
Jul-11
Oct-11
Jan-08
Apr-08
Jul-08
Oct-08
Jan-08
Apr-08
Jul-08
Oct-08
Jan-07
Apr-07
Jul-07
Oct-07
Jan-07
Apr-07
Jul-07
Oct-07
Jan-09
Apr-09
Jul-09
Oct-09
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-10
Apr-10
Jul-10
Oct-10
Note : Net non-commercial position includes net non-commercial as well as net non-reportable positions. Net long (+) , net short (-).
Source : Commitments of Traders Report by CFTC and ICE . Futures price based on COMEX, NYMEX, CBOT and ICE markets. Data extracted from Bloomberg.
39
Macroeconomic and Monetary Developments Second Quarter Review 2010-11
155 10.0
150
8.0
145
6.0
Per cent
140
4.0
135
2.0
130
125 0.0
120 -2.0
June
April
May
July
January
February
March
August
September
October
November
December
June
April
May
July
January
February
March
August
September
October
November
December
2009-10 2010-11 2011-12 2009-10 2010-11 2011-12
10.0 25.0
8.0 20.0
Per cent
Per cent
6.0 15.0
4.0 10.0
2.0 5.0
0.0 0.0
June
June
April
April
March
May
July
January
February
March
May
July
January
February
August
August
September
October
November
December
September
October
November
December
2009-10 2010-11 2011-12 2009-10 2010-11 2011-12
momentum, while emphasizing the critical though volatile, remained significantly positive
importance of a low inflation environment as a (Chart VI.3). Since December 2010, the major
pre-condition to sustainable and inclusive contributor to price rise has been non-food
growth. manufactured products reflecting generalisation
VI.9 The month over month (m-o-m) of the inflationary pressures (Chart VI.4). It may
seasonally adjusted changes in the price level, be noted that the second round and indirect
27.8 25.9
32.0 28.0
38.8 39.7
4.3
6.4 24.6
37.6
24.4 10.3
Total Food Fuel & Power Primary Non-food Articles+Minerals Manufactured Non-food Products
Note: Pie Chart Represents the Percentage Contribution of Different sub-groups to increase in WPI.
40
Macroeconomic Outlook
impact of past increases in food, fuel and non- cotton prices in line with declining global prices.
food primary articles prices transmitted to non- On the other hand, oilseeds prices have firmed
food manufactured products in an environment up in recent months. As the area sown under
of buoyant demand conditions. both cotton and oilseeds have increased in the
current year as compared with the previous year
Food inflation remains elevated despite levels and also that the global prices have
record food production declined, non-food primary articles inflation
VI.10 Though primary food articles inflation may remain moderate in the near-term.
moderated from the levels of over 20 per cent Increase in freely priced fuel products and
witnessed in Q1 of 2010-11, it still remains high revision in administered prices keep fuel
with the average inflation during 2011-12 so inflation high
far (up to September) at 8.9 per cent. A
VI.12 Increase in administered prices of fuel
decomposition of food articles inflation
products effected in June 2011 led to firming
indicates that the price pressures have been
up of fuel inflation. Since then, prices of freely
moderate for cereals whereas increases have
priced mineral oil products have increased
been significant in the case of protein-rich items
partly on account of the recent depreciation of
(Chart VI.5). Demand has been growing in these
the rupee. Notwithstanding recent increases, the
items in recent years with rising income and
pass-through of global inflation to domestic
changes in dietary pattern in favour of protein-
inflation remains incomplete (Chart VI.6a).
rich items. Price pressures in these items could
continue in the absence of supply response. VI.13 Domestic coal prices have remained
Significant increase in nominal wages in rural unchanged in 2011-12 so far and given the
areas (Chart VI.9) in recent years and successive incomplete pass-through of past increases in
increases in Minimum Support Prices (MSP) global coal prices, an upward revision in coal
have weakened considerably the expected prices may become necessary going forward.
favourable impact of a normal monsoon this Electricity prices increased by about 4 per cent
year and record food production. in September 2011, partly reflecting the increase
in input costs. The increase in electricity prices
Non-food articles prices remain moderate has been much less as compared with the
VI.11 During 2011-12 (up to October 8, 2011), increases in other energy prices as well as coal
non-food articles prices have moderated prices (Chart VI.6b). Given this, electricity prices
somewhat, largely driven by decline in raw are likely to be revised upwards in many states.
Chart VI.5: Primary Food Articles: Index and Inflation
a: Index b: Inflation (Y-o-Y)
210 40.0
200 35.0
190 30.0
180
2004-05=100
2004-05=100
25.0
170
20.0
160
15.0
150
140 10.0
130 5.0
120 0.0
Jan-29-11
Mar-5-11
Apr-9-11
May-14-11
Jun-18-11
Jul-23-11
Aug-27-11
Oct-1-11
Apr-4-09
May-9-09
Jun-13-09
Jul-18-09
Aug-22-09
Sep-26-09
Oct-31-09
Dec-5-09
Jan-9-10
Feb-13-10
Mar-20-10
Apr-24-10
May-29-10
Jul-3-10
Aug-7-10
Sep-11-10
Oct-16-10
Nov-20-10
Dec-25-10
Jan-29-11
Mar-5-11
Apr-9-11
May-14-11
Jun-18-11
Jul-23-11
Aug-27-11
Oct-1-11
Apr-4-09
May-9-09
Jun-13-09
Jul-18-09
Aug-22-09
Sep-26-09
Oct-31-09
Dec-5-09
Jan-9-10
Feb-13-10
Mar-20-10
Apr-24-10
May-29-10
Jul-3-10
Aug-7-10
Sep-11-10
Oct-16-10
Nov-20-10
Dec-25-10
Food Articles Excluding Protein Based Food Food Articles Excluding Protein Based Food
Protein Based Food Articles Protein Based Food Articles
41
Macroeconomic and Monetary Developments Second Quarter Review 2010-11
70.0 225.0
Index: 2004-05=100
60.0 205.0
50.0 185.0
Per cent
40.0 165.0
30.0 145.0
20.0 125.0
10.0 105.0
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Apr-11
Aug-11
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Apr-05
Aug-05
Dec-05
Apr-08
Aug-08
Dec-08
Apr-07
Aug-07
Dec-07
Apr-09
Aug-09
Dec-09
Apr-06
Aug-06
Dec-06
Apr-04
Aug-04
Dec-04
Apr-10
Aug-10
Dec-10
Non-Administered Group Administered Group WPI-Coal WPI-Non-Administered Mineral Oils
Indian Basket Crude Oil WPI-Electricity
Table VI.2 Imports and WPI - Risk of Depreciation Induced Price Pressures
Items Weight of the Item in Share of the Imported Item in Total Imports
WPI (2004-05=100) 2010-11 2011-12 (April-May)
1 2 3 4
Petroleum, crude & products 10.26 30.07 32.16
Machine tools 8.93 0.63 0.60
Iron & steel 6.36 2.73 1.94
Transport equipments 5.21 3.12 1.95
Vegetable oils fixed (edible) 3.04 1.83 1.45
Fertilizers 2.66 1.92 0.89
Coal, coke & briquittes etc. 2.09 2.74 3.02
Organic chemicals 1.95 3.17 2.70
Artficial resins, plastic materials etc. 1.86 1.95 1.41
Manufactures of metals 1.31 0.92 0.78
Inorganic chemicals 1.19 1.01 0.88
Pulp and waste paper 1.02 0.32 0.27
Non-ferrous metals 1.00 1.14 1.09
Electronic goods 0.96 6.10 6.15
Pulses 0.72 0.43 0.28
Gold 0.36 9.61 14.67
Note: The items presented in col. 2 and 3 & 4 may not exactly correspond, given differences in classification of items in WPI and Imports
42
Macroeconomic Outlook
Table VI.3: Comparative Movement of Oil Chart VI.8: Major Contributors to Non-food
Price and Exchange Rate Since July 2011 Manufactured Products Inflation
July-11 October-11 Change in 9.0
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Basket (Rupee) 4995.8 5094.1 2.0
Note : The composition of Indian Basket of Crude Oil represents Average
of Oman & Dubai for sour grades and Brent (Dated) for sweet Chemicals Textiles Basic Metals Others
grade in the ratio of 67.6:32.4. Manufactured Non-Food Products Inflation (Per cent)
VI.16 Among non-food manufactured products, Input cost pressures alongside steady
textiles, chemicals and metals continue to demand underpin the generalised inflation
contribute the most to the increase in prices of
VI.17 While supply shocks are often presumed
manufactured non-food products (i.e., about 69
to be temporary, at times, they could be repeated
per cent in September 2011) (Chart VI.8). Input
and thereby cause high inflation over a sustained
cost pressures have been significant for these
products in the recent past. While the recent period. In the absence of demand, however, even
moderation in cotton prices could be reflected repeated supply shocks cannot cause a
in textile prices with a lag, depreciation of the generalised inflation. If prices of commodities
rupee would offset the impact of any softening experiencing supply shock go up, prices of other
of global commodity prices on the price outlook commodities must decline in the absence of
for metals and chemicals significantly. Inflation demand. Thus, high inflation that is broad based
in non-food manufactured products is also driven across a whole range of items covered in the
by a few items with low weights in WPI relative price index is only feasible with the support of
to the high weighted contribution. 24 out of 498 buoyant demand.
items under the manufactured non-food
VI.18 Information on recent trends in
products, with a combined weight of 14.4 per
expenditure patterns as available from the 66th
cent in overall WPI accounted for as high as
round of NSSO consumption expenditure
51.2 per cent of the inflation in manufactured
survey corroborates the role of demand. Growth
non-food products in September 2011.
in monthly per capita expenditure has been
Chart VI.7: Manufactured Non-food Products:
Index, Inflation and Month-over-Month stronger in the second half of 2000s as compared
Seasonally Adjusted Annualised Changes with the first half (Table VI.4).
20.0 140
VI.19 Wage growth has been significant both
15.0 135
in the formal and informal sectors relative to
Index: 2004-05=100
10.0 130
the inflation facilitating generalisation of supply
Per cent
5.0 125
side induced inflation shocks. Increase in rural
0.0 120
wages has been in excess of the level of inflation
-5.0 115 experienced in rural areas (Chart VI.9). In the
-10.0 110 formal sector, Reserve Banks company finance
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
43
Macroeconomic and Monetary Developments Second Quarter Review 2010-11
Table VI.4: Monthly Per Capita Expenditure Growth Chart VI.10: Staff Costs in the Corporate Sector
(Annual Compound Growth, Mixed Reference Period Basis) 25
1999-2000 to 2004-05 to
2004-05 2009-10 20
The relative share of interest costs in total costs 2009-10 2010-11 2011-12
Chart VI.9: Increase in Rural Wages Chart VI.11: Interest as a Share of Sales and Costs
Relative to Inflation* 5.0
25.0
4.5
20.0
4.0
15.0
Per cent
Per cent
3.5
10.0
5.0 3.0
0.0 2.5
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
2.0
Wage growth (Rural Unskilled Labourers) Q1 Q2 Q3 Q4 Q1
CPI-RL Inflation
Real Wages 2010-11 2010-11 2010-11 2010-11 2011-12
*: Y-o-Y Growth in Rural Unskilled Labourer (Male) wage and CPI-Rural Interest as a per cent of total cost
Labourers inflation (Y-o-Y).
Source: Labour Bureau, Ministry of Labour Interest as a per cent of total sales
44
Macroeconomic Outlook
8.0
6.0
4.0
2.0
0.0
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
-2.0
VI.24 Moderation in non-food manufactured rate depreciation would partly offset the
products inflation in the second half could be magnitude of softening. For the conduct of
conditioned by softening of demand resulting monetary policy the outlook for inflation as
from past monetary policy actions as also also private consumption and investment
the spillover from weaker global growth demand would be critical. Current
momentum. While softening of input cost assessment of drivers of inflation suggests
pressures could imply weaker transmission moderation of inflation in the later part of
to non-food manufactured products, exchange 2011-12.
114 120
Index: 2010=100
112
115
Index: 2010=100
110
110
108
105
106
100
104
102 95
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
100
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
45
VII. MACROECONOMIC OUTLOOK
Inflation continues to be sticky while growth risks have increased. The business expectation
surveys of various agencies, as well as the Reserve Banks Industrial Outlook Survey suggest a
weakening of business climate. The professional forecasters survey show that forecasts for
growth have been revised downwards while those for inflation have been marginally increased.
Growth risks increase on global headwinds VII.4 The benefits of the recent fall in global
while sticky inflation adds to complexity commodity prices have been largely offset by
VII.1 Growth risks have increased on global the rupee depreciation. The benefit from any
headwinds, while inflation continues to be sticky further fall may also remain limited as a result
adding to the complexity for monetary policy. of the incomplete passthrough of the earlier
Should global downturn accentuate, monetary increase in global commodity prices, as was
and fiscal policy space exists, though the current explained earlier in the RBI Annual Report
high inflation reduces the degrees of freedom 2010-11. Since then, suppressed inflation has
somewhat. The IMFs baseline projections been partly tackled through revisions in
suggest that global economy would continue to petroleum and electricity prices, but further
grow at a moderate pace ahead. Recovery is upward revision cannot be ruled out.
unlikely to peter out even in the case of advanced VII.5 On the other hand, with weakening
economies. Nevertheless, in a financial world economic activity levels, the economy may
several outcomes are possible as perceptions of grow at a rate somewhat lower than what was
economic agents can shift fast impacting their anticipated earlier. Indicators suggest that
economic behaviour. It would, therefore, be growth moderation has continued into Q2 of
necessary for all stakeholders - private or 2011-12. Growth is also likely to stay weak in
government - to quickly build upon the liquidity the second half of 2011-12, especially if the
buffers and hedge against financial risks. global downturn continues. As such, challenges
VII.2 Even as the global growth cycle seems from the policy perspective have become even
to be turning, persistence of inflation at high more complex with persistent inflation and
levels would continue to need to be factored in increased risks to growth.
the policy. The baseline projection for WPI VII.6 The IMFs baseline scenario is that the dip
inflation for March 2012 was placed at 7.0 per in global growth this time around would be far
cent at the time of the First Quarter Review of muted than during 2008-09. Yet, it is important
Monetary Policy on July 26, 2011 anticipating for the policymakers to be prepared for tail risk
some moderation in the later part of the year. events. In such an event, some room for counter-
Forward-looking assessment suggests that cyclical action may be generated with a further
inflation will play out broadly in line with the
fall in commodity prices. Yet, it is important to
earlier anticipated path and the risks to the
note in this context that inflation may turn out
baseline projection are now balanced.
to be stickier than before due to structural
VII.3 Generalised inflationary pressures were impediments. Further room for front-loaded
still in evidence till September 2011. Inflation action may be limited. Headline inflation has
in non-food manufactured products remained now stayed in 8-11 per cent range for the past
high. Food inflation has surprised on the upside 21 months. Non-food manufacturing inflation
in the recent period in spite of favourable has been more than 7 per cent for the past eight
monsoon and likelihood of record kharif output, months against a long-term average of 4.4 per
partly reflecting the large increase in MSPs. cent.
46
Macroeconomic Outlook
Monetary and fiscal policy space exists but growth-inflation challenge along with
inflation constraints important complimentary demand management and
structural policies.
VII.7 Fiscal policy space may be constrained
if inflation stays elevated. Currently, Business expectations surveys indicate
government spending is adversely impacting the moderation
objective of containment of aggregate demand. VII.10 A comparative study of business
On current assessment, the Government is expectations surveys, conducted by different
unlikely to meet its deficit targets for 2011-12. agencies, indicates stiff moderation in business
A slowdown is likely to impact revenues and climate. Both global and domestic factors seem
tax cuts will be difficult. The fiscal position has to have weakened the perception about the
macro-economic consequences through its performance of the economy. The CII and FICCI
impact on interest rates, exchange rates and business confidence indices have shown
price level and is also an important determinant significant decline over the previous quarter and
of the costs of overseas borrowings. It is, year too. The CII index stands lower than the
therefore, important to create fiscal space within index value recorded during the period October-
the framework of fiscal rules. March 2008-09, following the global financial
VII.8 There are upside risks to inflation from crises. The top two concerns, according to CII
still incomplete pass-through of global Business Outlook Survey are high interest rates
commodity prices, downward stickiness of food and high raw material costs. The latest survey
prices, recent revisions in minimum support of NCAER on business confidence recorded
prices and evidence of wage price spiral. In view significant decline in index on both q-o-q and
of this, the inflation has proved to be stubborn y-o-y basis (Table VII.1). Dun & Bradstreet
and may subside only slowly in the rest of Business Optimism Index is at the second
2011-12. The challenge at this juncture is to lowest since September 2010 (Chart VII.1a).
contain inflationary pressures, while factoring Persistent high inflation, weakening demand,
in the lags in monetary transmission, which are lower availability of credit and prevailing global
long and variable and, therefore, difficult to uncertainties appear to be affecting the business
sentiments of the Indian companies.
assess.
VII.11 The seasonally adjusted HSBC Markit
Leading indicators suggest growth may Purchasing Managers Indices (PMI) for
moderate slowly September 2011 indicate the economic activity
VII.9 Current assessment is that growth may may be slowing down. Manufacturing PMI
moderate slowly and not fall to the levels seen registered the weakest expansion in the last two-
during the post-Lehman crisis. As such, existing and-a-half years. While the services PMI
space for monetary management can tackle the pointed towards a stagnation in activity.
47
Macroeconomic and Monetary Developments Second Quarter Review 2010-11
160 120
70 115
65 140 110
105
60
120 100
55 95
100 90
50
85
45 80 80
Jan-Mar-11
Apr-Jun-11
Jul-Sep-11
Oct-Dec-11
Jan-Mar-09
Apr-Jun-09
Jul-Sep-09
Oct-Dec-09
Jan-Mar-10
Apr-Jun-10
Jul-Sep-10
Oct-Dec-10
Dec-11
Mar-11
Jun-11
Sep-11
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Survey suggests Industrial Outlook has moderate as net responses on production, order
weakened books and exports declined for the assessment
as well as expectation quarters. Most industry
VII.12 The 55th round of the Industrial
groups reported lower optimism on demand and
Outlook Survey (http://www.rbi.org.in/IOS55)
financial conditions.
of the Reserve Bank conducted during July-
September 2011, showed further decline in VII.13 The outlook on availability of finance
Business Expectation Index (BEI). The index was also less optimistic while the respondents
is a composite indicator based on assessment expected cost of finance to rise further. A sizeable
of several business related parameters for the proportion of respondents anticipated continued
assessment quarter (July-September 2011) as increase in raw material costs, which may affect
well as for the expectation quarter (October- profit margins adversely (Table VII.2).
December 2011). However, BEI still remained
in growth terrain (i.e. above 100, which is the Downward Revision in growth forecast by
mark that separates contraction from expansion) other agencies
(Chart VII.1b). The demand conditions of the VII.14 Various agencies have revised
Indian manufacturing sector continued to downwards their earlier growth forecasts for
TableVII.2 : Reserve Banks Industrial Outlook Survey
Net Response
Parameter Oct-Dec Jan-Mar Apr-Jun Optimistic
July-Sept Oct-Dec
2010 2011 2011 Response
2011 2011
E A E A E A E A E
1 2 3 4 5 6 7 8 9 10 11
1. Overall Business Situation Better 47.5 45.9 50.1 38.6 41.4 32.6 39.8 18.7 35.2
2. Overall Financial Situation Better 39.6 37.1 41.1 27.1 33.4 24.1 30.6 11.7 26.3
3. Availability Of Finance Improve 31.3 30.3 32.3 23.8 27.3 21.5 24.2 12.1 20.2
4. Cost Of External Finance Decrease -28.3 -33.9 -31.3 -42.5 -35.0 -49.0 -39.7 -50.2 -41.0
5. Production Increase 49.1 43.9 48.6 41.4 40.0 32.1 40.6 22.6 39.9
6. Order Books Increase 44.8 37.9 44.0 34.7 38.4 28.1 35.9 20.3 33.4
7. Level Of Capacity Utilisation Above Normal 7.2 5.6 9.5 4.9 4.4 -0.7 4.3 -6.4 0.3
8. Cost of Raw Material Decrease -49.3 -63.9 -53.6 -71.9 -57.0 -65.5 -51.7 -58.1 -49.7
9. Employment in the Company Increase 21.0 19.4 20.6 18.7 17.4 18.2 19.4 15.6 16.5
10. Exports Increase 26.1 23.1 26.3 18.9 24.0 18.2 25.8 13.1 22.1
11. Imports Increase 22.2 20.9 21.3 19.9 18.9 17.6 19.0 15.7 16.9
12. Selling Price Increase 17.0 20.2 18.6 26.5 23.7 21.5 18.3 10.7 16.0
13. Profit Margin Increase 9.2 -0.4 8.3 -4.3 3.8 -9.9 2.5 -17.1 -1.6
Note: 1. Net response is measured as the percentage share differential between the companies reporting optimistic (positive) and
pessimistic (negative) responses; responses indicating status quo (no change) are not reckoned. Higher net response
indicates higher level of confidence and vice versa.
2. E: Expectations and A: Assessment.
48
Macroeconomic Outlook
India for 2011-12, with some even projecting Furthermore, domestic industry is exhibiting
the growth to be below 8.0 per cent signs of slowdown on account of the lagged
(Table VII.3). effects of past monetary policy actions. Risks
to growth also emerge from the worsening
VII.15 Going forward, there are significant
global environment, volatility in international
downside risks to growth during 2011-12. GDP
crude oil prices and high inflation.
data for Q1 2011-12 and various lead indicators
are indicative of further moderation in growth. Survey of Professional Forecasters 1
The buoyant export growth observed up to suggest lower growth, higher inflation
August 2011 may not hold out on account of VII.16 In the 17 th round of 'Survey of
the sluggish growth in the advanced economies Professional Forecasters' (http://www.rbi.org.in/
and further deepening of global uncertainties SPF17), conducted by the Reserve Bank, growth
mainly because of euro area crisis, downward forecasts for 2011-12 have been slightly revised
revision of USs credit rating by S&P and downward as compare to previous survey
lowered debt ratings for several banks. (Table VII.4). At sectoral level growth forecasts
49
Macroeconomic and Monetary Developments Second Quarter Review 2010-11
are revised downward for 'agriculture and allied Chart VII.2: Net Response to Current Situation
activities' and industry, whereas that for services Index (CSI) and the Future Expectations
Index (FEI)
has been revised upward marginally. Annual
average inflation forecast for the year 2011-12 122
120.8
120.2
50
JAYANT PRINTERY