RBI maintains status quo

 (Repo rate remains unchanged at 7.25% and CRR at 4%)

RBI in its mid quarter review of monetary policy for 2013-14 has maintained cash reserve ratio (CRR) of scheduled banks unchanged at 4% of their net demand and time liabilities; and the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 7.25%. Consequently, the reverse repo rate under the LAF will remain unchanged at 6.25%, and the marginal standing facility (MSF) and the Bank Rate at 8.25%.

The RBI policy rates so far

Components	Sep-10	Sep-11	Sep-12	29-Jan-13	19-Mar-13	03-May-13	17-Jun-13
CRR	6.00%	6.00%	4.50%	4.00%	4.00%	4.00%	4.00%
Repo Rate	5.75%	8.25%	8.00%	7.75%	7.50%	7.25%	7.25%
Reverse Repo Rate	4.50%	7.25%	7.00%	6.75%	6.50%	6.25%	6.25%
WPI Inflation	8.90%	9.80%	7.50%	7.18%	6.84%	5.96%	4.7%@
IIP growth	13.00%	3.30%	0.10%	-0.1%	2.4%	0.6%	2.3%**
Real GDP growth	8.90%	7.7%  ˆ	5.50%”’	5.30%$	5%	5%	5% #

 Source: PHD Research Bureau, compiled from various sources

Note: ˆ Data for Q1FY12, “’ Data for Q1FY13, $Data for Q2 FY13, @Data for May 2013,

# Data for provisional estimates FY13 ** Data for April 2013

Snapshot of mid quarter review of the monetary policy 2013-14: June 2013

Since the annual policy statement in May, the global economic activity has slowed and risks remain elevated on account of uncertainty over policies of systemic central banks. On the domestic front, macroeconomic conditions remain weak, hamstrung by infrastructure bottlenecks, supply constraints, lacklustre domestic demand and subdued investment sentiment. Inflation has been moderated as projected. However, upside pressures on the way forward from the pass-through of rupee depreciation, recent increases in administered prices and persisting imbalances, especially relating to food, pose risks of second-round effects. As recent experience has shown, shifts in global market sentiment can trigger sudden stop and reversal of capital from a broad swath of emerging economies, swiftly amplifying risks to the outlook. India is not an exception.

Global economy remains patchy and uneven

During Q1 of 2013, among advanced economies (AEs), the growth in US and Japan improved while that in the euro area contracted. While, the growth in most emerging and developing economies (EDEs) has been relatively resilient, although in some large emerging economies, sluggish external demand and stalled domestic investment are dragging down economic activity. Inflation has been easing in the advanced economies (AEs) due to weak demand conditions. However, the emerging and developing economies (EDEs) presents a mixed picture, inflation remains elevated in the BRICS except China . Commodity prices, other than the price of crude, have generally softened in recent months.

Domestic growth outlook

Recently, Central Statistics Office (CSO) has estimated India ’s GDP growth at 4.8% during Q4 of 2012-13, which has been a marginal improvement over the previous quarter. The growth of industrial production decelerated to 2.3% in April after picking up in the preceding month. All constituent categories of industry have slowed, with a persistent contraction in mining activity. The sharp weakening in the growth of capital goods production points to still damped investment demand whereas a pick-up in consumer non-durables could be indicative of a fragile return of consumer confidence. On the other hand, the services sector purchasing managers’ index rose in May on order flows. The onset of the south-west monsoon has been strong and on time.

Inflation outlook

Headline WPI inflation eased for three months in succession with the May reading at 4.7%, down from an average of 7.4% in 2012-13. All constituent categories, barring food, have moderated. In the fuel category, coal and mineral oil prices declined, partly offsetting the upward revision in administered prices of electricity. Non-food manufactured products inflation too ebbed, driven by metal prices which fell for the eighth successive month in response to softening of global prices. Still elevated food inflation, particularly in respect of cereals and vegetables, sustained upside pressures on overall inflation. However, the retail inflation edged down to 9.3% from an average of 10.2% during last fiscal year.

Liquidity Conditions

Net average daily borrowings under the LAF have declined gradually from 1.2 trillion in March 2013 to 0.7 trillion in June 2013 so far (up to June 14) reflecting the sizable injection of primary liquidity through the reduction in the cash reserve ratio (CRR) in January, open market operations (OMO) purchases during Q4 of 2012-13, a significant reduction in the government’s cash balances with the Reserve Bank as well as two OMOs of 0.2 trillion in the current financial year so far.

External Sector

The most significant development in the external sector has been the movement in the exchange rate. The rupee depreciated by 5.8% as against the US dollar during the current financial year up to June 14. It fell by 6.6% during May 22-June 11 due to sell-off by foreign institutional investors, reflecting risk-off sentiment triggered by apprehensions of possible tapering off of quantitative easing by the US Fed. While the trade deficit has widened sharply due to a surge in festival-related/seasonal gold imports, available evidence suggests that a moderation in gold imports could be underway in June. Capital flows, which met the external financing requirement during April-May, moderated in June.

Overall outlook

At the global level, the International Monetary Fund (IMF) has warned of non-trivial risks of the global economy encountering a soft patch in the months ahead. On the domestic front, last year’s robust rabi production and the monsoon performance so far augur well for growth prospects. The spatial and temporal distribution of rainfall over the next three months will be crucial in determining the performance of agriculture. The continuing weakness in manufacturing activity needs to be urgently reversed. Key to reinvigorating growth is accelerating investment by creating a conducive environment for private investment, improving project clearance and implementation and leveraging on the crowding-in role of public investment.

On the inflation front, easing commodity prices at the global level and weaker pricing power of corporates at the domestic level are having a softening influence. Given that food inflation remains high, the inflation outlook will be influenced by concerted efforts to break food inflation persistence. The inflation outlook going forward will be determined by suppressed inflation being released through revisions in administered prices, including the minimum support prices (MSP) as well as the recent depreciation of the rupee.

Softer global commodity prices and recent measures to dampen gold imports are expected to moderate the CAD in 2013-14 from its level last year. The main challenge is to reduce the CAD to a sustainable level; the near-term challenge is to finance it through stable flows. The most recent number on the Centre’s fiscal deficit, at 4.9% of GDP for 2012-13, has turned out better than expected and instils confidence in the Government’s commitment to contain the fiscal deficit for 2013-14 at 4.8%. Perseverance with this consolidation should help in mitigating the twin deficit risks to the outlook. These positive developments, which have been acknowledged by international credit rating agencies, should have a favourable impact on investor confidence.

Warm regards,

Dr. S P Sharma

Chief Economist