RBI Unmoved by Pointers to Moderating Demand and Growth

The RBI formulated its Annual Monetary Policy for the year 2011-12 against a backdrop of moderating demand and growth, however, uncontrolled inflation has led the central bank to raise its key policy rates, for the 9th time since March 2010 and this time, quite sharply. While the RBI’s strong hawkish stance and bias, has been lauded by many, several analysts have also expressed the view that it is time that the emerging economy’s central bank adds to its arsenal more specific weapons to fight inflation rather than simply sacrificing the growth momentum. The RBI has of course pointed to the need to adjust domestic energy prices in line with the rising global prices, in order to reduce misalignment of energy demand with prices. Energy price adjustments may raise inflationary pressures in the short term but should definitely help curb the twin (fiscal and current account) deficits through adjustment of demand to actual prices. The problem with the continued hawkish bias is that it is the infrastructure sector which suffers most leading to further supply bottlenecks fuelling and adding to inflation imported from overseas.

The Review states that :

• According to the IMF WEO (April 2011), global growth is likely to moderate from 5.0 per cent in 2010 to 4.4 per cent in 2011. Growth is projected to decelerate in advanced economies due to waning of impact of fiscal stimulus, and high oil and other commodity prices. Growth in EMEs is also expected to decelerate on account of monetary tightening and rising commodity prices. Consumer confidence in major countries, which improved during January-February 2011, moderated in March 2011 on the back of higher oil prices.

• The Indian economy is estimated to have grown by 8.6 per cent during 2010-11. The index of industrial production (IIP), which grew by 10.4 per cent during the first half of 2010-11, moderated subsequently, bringing down the overall growth for April-February 2010-11 to 7.8 per cent. The main contributor to this decline was a deceleration in the capital goods sector. The growth is projected to be in the range of 7.4 per cent and 8.5 per cent in 2011-12 with 90 per cent probability

• According an RBI Survey (OBICUS), the order books of manufacturing companies grew by 7 per cent in October-December 2010 as against 9 per cent in the previous quarter indicating some moderation. The Reserve Bank’s forward looking Industrial Outlook Survey (IOS) shows a decline in the business expectations index for January-March 2011 after two quarters of increase. The services PMI for March 2011 showed some moderation as compared with the previous month.

The baseline projection for WPI inflation for March 2012 is placed at 6 per cent with an upward bias. Inflation is expected to remain at an elevated level (around 9 per cent in the first half of the year due to expected pass-through of increase in international petroleum product prices to domestic prices and continued pass-through of high input prices into manufactured products. Against this backdrop the Monetary Policy Measures announced are

• The repo rate under the liquidity adjustment facility (LAF) has been increased by 50 basis points. Accordingly, it goes up from 6.75 per cent to 7.25 per cent.
• As per the new operating procedure, the reverse repo rate under the LAF, determined with a 100 basis point spread below the repo rate, will stand adjusted at 6.25 per cent.
• The Marginal Standing Facility (MSF) rate, determined with a spread of 100 basis points above the repo rate, gets calibrated at 8.25 per cent.
• The Bank Rate remains at 6.0 per cent.
• The cash reserve ratio (CRR) remains unchanged at 6 per cent of NDTL of scheduled banks.

Savings Bank Deposit Interest Rate

• Pending a final decision on the policy of deregulating the savings bank deposit rate, it has been decided to increase the savings bank deposit interest rate from the present 3.5 per cent to 4.0 per cent with immediate effect.

Changes in operating procedures of Monetary Policy and several developmental and regulatory policies have also been announced. Detailed Highlights are presented in our monthly statistical bulletin EUpDates (contact for subscription: ecofin.surge@gmail.com)