India Economy Thread II

[MeMumbaikar]

i am in support of GST


anyways

it seems the rupee falling might not be so bad, considering brent crude is falling at a much faster pace

http://www.reuters.com/article/2011/...7AD06820111214

http://uk.reuters.com/business/commodity?symbol=GB@IB.1


this might actually work out for India. Boost our exports and keep our imports within check. I hope brent crude calls to below $100 with rupee at 55. We might actually see prices fall at the pump

when the rupee was at 44, barrel of brent crude was $120 with the libyan troubles. If it reaches less than $100 with rupee at 55 it works out cheaper. Assuming constant costs such as refining etc.

[SSCaddict]

only if it remains below $100

[MeMumbaikar]

I think it just may down to 105.68

might be below 100 for the year end

[SSCaddict]

even surplus countries are having depreciating currency

Rupee at 54.3

At 55 RBI should come in full force to bring it down to at least 52.

[SSCaddict]

i must say damage control is very near, tomorrow CRR cut is imminent.

[Leo_r]

Now, a green cess on petrol, cars?

NEW DELHI: Buying and running and two-wheelers could soon become a costly affair with a working group suggesting a green surcharge of Rs 2 on every litre of petrol, a of 3% of the annual insured value of all private vehicles and a steep urban transport tax to be collected at the time of purchase of private vehicles.

The panel, headed by Delhi Metro chief , has suggested urban transport tax on purchase of new cars and two-wheelers at 7.5% of the total cost of vehicles and 20% in case of personal diesel cars.

The recommendations, which are guided by the "polluter pays principle", aim to discourage use of private vehicles by imposing higher taxes and also help generate resources to fund public transport projects.

It is estimated that the new surcharge and taxes will help the government generate Rs 235,741 crore in the 12th five-year plan (2012-17) and Rs 22,40,804 crore over 20 years.

It was decided not to impose the green surcharge on diesel considering the fuel's multiple uses and the problems in dual pricing. However, this was offset with the higher urban transport tax on new diesel cars at 20% compared to 7.5% for petrol-driven variants.

The annual green cess of 3% is proposed to be collected through insurance companies. These firms, which collect around 4% of the insured value of the vehicle as annual premium, will now collect 7% and pass on the additional 3% to the government.

With huge investment needed in the urban transport sector which the Centre cannot meet from traditional budgetary sources, innovative financing mechanisms were being explored, an official said. Even public private partnership projects could only partially meet the funding needs, he added.

The resources mobilised from the new surcharge and taxes will be pooled in a dedicated national urban transport fund to meet the growing needs of urban transport.

The working group also suggested dedicated funds at the state and city level through resources like land monetisation, betterment levy, land value tax and hike in property tax. It also recommended imposing congestion tax, a cess on sales tax and hike in parking charges to generate resources for the fund.

Times View

A 'green surcharge' on petrol may seem like a good way of incentivising eco-friendly behaviour, but it's actually not as good an idea as it sounds. For starters, the price of petrol in India already has a massive tax component and adding further to it amounts to over-burdening the consumer. Further, if the idea is to nudge people to use public transport and move them away from private vehicles, it is unlikely to work as things stand. The simple reason for assuming that is that most Indian cities have no public transport infrastructure worth the name. As the metro in Delhi has shown, creating world-class public transport will do more to move people away from private vehicles than trying to force them in that direction without any viable options.

http://economictimes.indiatimes.com/...w/11105550.cms

[MeMumbaikar]

Originally Posted by SSCaddict

i must say damage control is very near, tomorrow CRR cut is imminent.

yup food inflation down

time to cut.....

[think-tank]

Food inflation is down to 4.3%, what about the gross inflation?

[MeMumbaikar]

Originally Posted by think-tank

Food inflation is down to 4.3%, what about the gross inflation?

9.1

[sixsigma1978]

Comparison of inflation rates of major trading nations.

TradingEconomics

[murlee]

A positive spin put on weakening rupee...

Blessing in disguise

What happens when something is underpriced for long? Well, it gets over-consumed till a price correction, which is often quite sudden, happens. This certainly holds true for the rupee's exchange rate. Between April 2004 and July 2011, the dollar's value, despite occasional bouts of weakening, remained virtually constant at Rs 44 or thereabouts. During the same period, however, the wholesale price index of all-commodities rose by nearly 55 per cent, generating a contradiction between the rupee's steady erosion of purchasing power at home and its apparent rock steadiness against an external measure of value — the dollar. That resulted in more ‘consumption' of dollars, both for imports as well as borrowings often for purely working capital needs. As firms found it cheaper to pay in dollars to source products from abroad, rather than manufacture them domestically at ever increasing cost, the share of imports in India's GDP went up from 16 per cent in 2004-05 to 22 per cent in 2010-11. A combination of lower interest rates and what seemed an eternally strong rupee also made them increasingly opt for foreign currency borrowings. No wonder, a Business Line analysis of 1,300 National Stock Exchange-listed companies for 2010-11 showed their net foreign exchange outgo at Rs 468,451 crore. Even after excluding oil companies, the figure still came to Rs 104,645 crore.

What the rupee's recent fall — from Rs 43.95 on July 27 to well above Rs 54 now — would basically do is to end this party. Till now, the corporate supply of dollars was coming not only from their ‘production' through exports, but also from overseas capital inflows. With the European debt crisis and overall uncertain global economic outlook resulting in a drying up of inflows, besides even hurting exports, there are simply no dollars to fund the earlier consumption levels. It would necessitate a change in strategy for corporates. An artificially strong rupee had bred a certain complacency among many of them. They would now have to learn to hedge not just financially, but also physically to cut down reliance on imports. This would mean investing more in domestic supply chains and production ecosystems. Take Nokia India. The Finnish mobile handset maker's factory at Sriperumbudur in Tamil Nadu – its largest in the world – currently sources chargers, plastic body parts and casings locally. The rupee's slide has led to its extending that plan to critical components such as display screens and batteries as well.

Of course, it is not possible to follow the above strategy across every sector. Nor is it desirable to go back to the old models of inefficient import substitution industrialisation. Moreover, there is no escape from imports in the case of oil, fertilisers or many other minerals, in which the country is inherently short. The way forward is to recognise that a weak rupee is creating an opportunity to shore up the domestic production base – something that may have been missed during its ‘strong' phase.

http://www.thehindubusinessline.com/...?homepage=true

[SSCaddict]

that inflation chart has CPI for all other countries other than India which is WPI.

BTW finally RBI took steps today:->RBI steps in to check rupee slide

[sixsigma1978]

del - wrong data

[hobbes100]

Originally Posted by sixsigma1978

Yea - India's CPI has fallen to 4.8%

That's UK's CPI!

India doesn't even put out reliable CPI data, that's why WPI is used for the official headline inflation number. I heard they have been working on putting together more reliable CPI data for some time, but hasn't happened yet.

[numb.soul]

read in todays TOI



Coming soon : India's scariest movie - ab tak 56 - The rupee

[think-tank]

Originally Posted by numb.soul

read in todays TOI



Coming soon : India's scariest movie - ab tak 56 - The rupee

Ruppee has fallen to 52.3.

[rathibent]

Originally Posted by think-tank

Ruppee has fallen to 52.3.

Rather it should be rupee has risen to 52.3!!!

[Leo_r]

India sees illicit fund outflows of $128 bn in 2000-09 period..

WASHINGTON: India witnessed illicit financial outflows of a staggering USD 128 billion during the 10 years to 2009, making it one of the biggest victims of illicit money among developing nations, says a report.

The startling data come at a time when the country is aggressively exploring ways to fight the black money menace.

The study by Washington-based research group Global Financial Integrity (GFI) showed that the developing world lost a whopping USD 8.44 trillion over the decade ended 2009.

GFI's report focuses on the amount of money flowing out of developing economies via crime, corruption and tax evasion.

In the list of 20 biggest victims of illicit financial flows over the decade, which is topped by neighbouring China, India has been ranked at the 15th spot.

With an illicit fund flow of USD 2.74 trillion, China is at the top followed by Mexico (USD 504 billion) and Russia (USD 501 billion) at second and third positions, respectively.

"Developing countries lost USD 903 billion in illicit financial outflows in 2009 despite the massive slowdown in economic activity which rocked world markets in late 2008," GFI said in a statement.

The findings are based on amount of illegal capital flowing out of 157 different developing countries over the 10-year period from 2000 through 2009.

"While USD 903 billion marks a drop from the USD 1.55 trillion that illicitly flowed out of the developing world in 2008, the study finds the decrease is almost entirely attributable to the global financial crisis rather than any governance improvements or economic reforms," GFI said.

http://economictimes.indiatimes.com/...w/11124009.cms

[hobbes100]

A good article in today's Business Standard that sums up the current economic malaise in the country. It's funny, apparently bureaucrats are playing video games during office hours as they don't have much to do given govt is at a standstill!

Sadly, the situation may not improve until 2014 (assuming Congress gets thrown out in that election). In fact, it might get worse, as Congress cranks up the populism engine as we get closer to the elections!

http://www.business-standard.com/ind...ders/153072/on

'Incredible' India? Hardly, say business leaders
Reuters / New Delhi December 16, 2011, 12:35 IST

Frustrated executives while away time in five-star hotels waiting for deals that never come, and civil servants play video games in their offices - growing signs of the reform limbo and crisis of confidence behind India's economic malaise.

Policy paralysis, corruption scandals and a government fearful of political backlash to any bold moves have combined with the global slowdown and worsening domestic finances in the last few months to derail Asia's third-largest economy.

India now faces the worst-case scenario that was touted earlier this year - stubbornly high inflation, slowing growth, a mounting fiscal deficit, a rupee that risks freefall -- and both policymakers and the Reserve Bank of India (RBI) have few levers to fix it.

For years, Indian entrepreneurs have boasted they can do business despite the government - adeptly working around potholed roads, clogged ports and reams of regulatory hurdles.

But government inertia - what many politicians see as "playing safe" - is taking its toll on corporate confidence.

Entrepreneurs once feted in Bollywood movies as national heroes, whose million-dollar homes and jetset lifestyles were a beacon for millions of India's aspiring middle classes, no longer seem capable of driving the $1.6 trillion economy.

"We may have seen phases of economic growth slower than this in the two post-reform decades, but never has the entrepreneurial mood been so low," wrote Shekhar Gupta, editor-in-chief of the Indian Express.

It's echoed across offices of business leaders from Mumbai to Delhi. One foreign executive described increasingly strained telephone conversations over the past year with his US-based CEO as deals became mired in red tape and ministerial inertia.

"They always understood that India was difficult to do business in. But not this difficult," said the executive, who asked not to be named as he was not authorised to speak for his company.

The banking sector is now under strain from bad loans.

Economic reforms that may bring in much-needed foreign investment, such as opening up the supermarket sector to the likes of Wal-Mart Stores Inc, have been put on hold as political parties eye important state polls next year.

Even reforms seen as no-brainers politically, such as the introduction of a digitalised national ID card or food subsidies for the poor, have faced delays as opposition parties and coalition partners smell blood ahead of a 2014 general election.

From cocky to fearful

India used to be full of brash business leaders.

When Tata Steel bought an Anglo-Dutch rival in 2007 for $12 billion, the newspaper headline "Empire Strikes Back" epitomised the supreme confidence of India's aggressive capitalist kingpins then on a global buying spree. Jaguar, Land Rover and other foreign brands soon followed into Indian hands.

The economy may grow at under 7% this fiscal year, down from initial forecasts of 9%. That's still a far cry from the around 3.5% "Hindu" rate of growth that plagued the decades after India's independence from Britain in 1947.

But these last few heady years have changed expectations.

These days, growth below 7% is enough for investors to delay projects, for banks to put off loans and for voters to get angry: 7% is the new 2-3%.

It was corruption scams surfacing over a year ago that may have started it - a potentially $39 billion scam involving selling telecoms licenses at rock-bottom prices effectively saw distracted politicians asleep at the economic wheel.

Suddenly politicians were jailed and billionaires questioned by police. It sent shudders through the political class. The invincibility of the political "untouchables" disappeared.

Inside India's famously bureaucratic ministries, middle-level civil servants passed the buck to top-level officials who in turn passed the buck to their reluctant political masters.

One defence contractor, who asked to not be named due to the sensitivity of the issue, recounted spending weeks at a top hotel, sipping drinks every evening with fellow frustrated arms dealers waiting for "imminent" defence ministry decisions that never came.

An Indian executive likened the country's economic malaise and government's reform limbo to an old village adage - a bullock knows that if it goes to work in the field it could get whipped, while the animal that lazes around far away does not.

"Once the spotlight is on, even minor mistakes become noticeable," said the vice-president of an infrastructure firm about a slowdown in decision making ever since corruption scandals broke last year. "That's why nobody wants to take decisions."

Many civil servants have been seen playing computer games during official hours when parliament sessions are adjourned or their minister goes on trips for G20 or World Bank meetings, according to one government official.

Prime Minister Manmohan Singh may be reform-minded. But with real power lying with the populist-inclined Sonia Gandhi, he has been unable or unwilling to press for new steps to modernise and open up the economy.

With Gandhi ill, reportedly with cancer, there are signs the family dynasty that has run India for decades has lost its bearings, increasingly unable to keep its coalition partners in line as parties jostle for power before the 2014 election.

The cabinet's one sudden announcement of major reform - allowing foreign firms to hold 51% stakes in the supermarket sector - may have been partly driven by economic panic as the rupee plummeted, with Asia's worst-performing currency suffering from capital flight to safe havens like US Treasuries.

But Singh's about-turn only 10 days later in the face of a political backlash underscored that, even at a time of alarm over the economy, politics and the concern about forthcoming elections took precedence.

Flows slow, confident ebbs

India's annual financing requirement of $119 billion is the highest in Asia, according to a Nomura report. The trade gap for the fiscal year to March 2012 is expected to widen sharply to $155-$160 billion from $104.4 billion a year ago.

Foreign funds are net sellers of about $300 million of Indian shares this year in sharp contrast to record investment of more than $29 billion in 2010, and the 30-share BSE Sensex is down more than 23%, making it the worst-performing major global market this year.

"Industry is geared up to deliver infrastructure in line with the strong growth pattern and the government's forecasts," said Russell Waugh, managing director of Leighton Welspun Contractors, part of Australia's Leighton Holdings.

"But the flow (of new projects) at the moment, the real flow, is not aligned with that gearing. So we're seeing most companies struggling."

Infrastructure assets, including telecoms, construction and power, which account for about 25% of total corporate credit, are now a key concern for banks.

Worries about rising bad loans prompted Moody's Investors Service earlier this month to cut its outlook on India's banking sector to "negative" from "stable", saying monetary tightening and a slowdown in the economy would cut bank loan growth.

The car industry - a symbol of the aspirations of millions of India's middle classes - is now an example of how slipping growth and high interest rates have hit consumer demand and investment decisions.

Car sales in India, which jumped 30% in the last fiscal year, have slumped due to high interest rates and rising input costs. Sales may just break even this fiscal year.

Maruti Suzuki, India's biggest automaker, is deferring an investment of $560-740 million in plants in the western state of Gujarat due to the economic gloom.

"When we will start work in Gujarat will depend on how the market improves in the future ... at the moment the general economic situation is too negative to justify it," Maruti Chairman RC Bhargava told Reuters. "There's no point creating excess capacity if the demand is not there."

No quick fix

There is no quick fix for the government, with the fiscal deficit set to beat its target of 4.6% of GDP. But there is little sign of efforts to help investment, including speeding up approvals of projects hit by red tape and environmental approvals.

One official, monitoring government infrastructure projects, said that of 558 government projects, 241 were delayed as of end-July, resulting in a cost overrun of some 20%, or more than $31 billion.

The projects, which include setting up airports, new railway lines, shipping ports, roads and power plants, have been delayed by more than two years on average due to issues of land acquisition, environmental clearance and rising costs.

Senior government officials, who declined to be named, described a finance ministry dominated by 76-year-old Pranab Mukherjee, who is more adept at bringing together unruly coalition allies than doing anything bold about the economy.

"Mukherjee is a politician first with little time for his own ministry as he is also the chief trouble shooter for the Congress party. Many bureaucrats don't even get to see him for days and have no access to him," said one.

"His style is very old world and some say not very responsive to financial markets. It's not surprising that in a crisis like what's confronting us currently, lack of imaginative leadership in the treasury department is also reflecting in the economic woes facing the country."

Mukherjee first became finance minister in 1982, way before India had begun to rethink its post-independence socialist, state-driven economic model.

For many, India will remain in limbo only until a real crisis prompts it to act - similar to the 1991 balance of payments crisis that ushered in the country's first economic reforms under Singh, who was then finance minister.

"At the end of the day, I feel you need crisis to get going again," said V Ravichander, who advises multinationals on doing business. "And even though our growth rates have fallen from 8 to 6.9% on the last estimate, I guess people feel 6.9 is not still low enough for us to do something about it."

But that inertia could means India faces some turbulent years ahead, exacerbated by the 2014 election that may just polarise the country further.

"The new Hindu Rate of Growth is 6% and on all evidence, from macroeconomic data to the empty billboards of Mumbai, we're headed there next year," wrote Gupta.

"Returning to economic stagnation like that is bad enough by itself. But this is not the forgiving India of the past. This India has tasted growth, progress, optimism and aspiration."

[think-tank]

load of BS

Mid Quarter Monetary Policy Review: December 2011

Monetary Measures

On the basis of the current macroeconomic assessment, it has been decided to:

keep the cash reserve ratio (CRR) unchanged at 6 per cent; and
keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.5 per cent.

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

Introduction

Since the Reserve Bank’s Second Quarter Review (SQR) of October 25, 2011, the global economic outlook has worsened significantly. The recent European Union (EU) summit agreement did not assuage negative market sentiments, thereby increasing the likelihood of persistent financial turbulence as well as a recession in Europe. Both factors pose threats to emerging market economies (EMEs), including India. Significantly, despite these developments, crude oil prices remain elevated.

On the domestic front, growth is clearly decelerating. This reflects the combined impact of several factors: the uncertain global environment, the cumulative impact of past monetary policy tightening and domestic policy uncertainties.

Both inflation and inflation expectations are currently above the comfort level of the Reserve Bank. However, reassuringly, inflationary pressures are expected to abate in the coming months despite high crude oil prices and rupee depreciation. The growth deceleration is contributing to a decline in inflation momentum, which is also being helped by softening food inflation.

Global Economy

The global economic situation continues to be fragile with no credible solution as yet to the immediate euro area sovereign debt problem. At the EU summit on December 8-9, the European leaders agreed on a new fiscal compact, involving stronger coordination of economic policies to strengthen fiscal discipline. While the agreement is necessary for medium and long-term sustainability of the euro area, its ability to resolve short-term funding pressures was questioned by markets. Q3 euro area growth, at 0.8 per cent, was anaemic and 2012 growth is now expected to be weaker than earlier projected. Reflecting these projections, the European Central Bank (ECB) cut its policy rate twice in the last two months, and also implemented some non-standard measures. By contrast, growth in the US in Q3 of 2011 was better than in Q2, although still substantially below trend.

Growth in EMEs is also moderating on account of sluggish growth in advanced economies and the impact of monetary tightening to contain inflation. In view of the slowing down of their economies, Brazil, Indonesia, Israel and Thailand cut their policy rates, while China cut its reserve requirements. EME currencies have also come under varying degrees of downward pressure as a result of global risk aversion and financial stress emanating from the euro area.

Domestic economy

Growth

GDP growth moderated to 6.9 per cent in Q2 of 2011-12 from 7.7 per cent in Q1 and 8.8 per cent in the corresponding quarter a year ago. The deceleration in economic activity in Q2 was mainly on account of a sharp moderation in industrial growth. On the expenditure side, investment showed a significant slowdown. Overall, during the first half (April-September) of 2011-12, GDP growth slowed down to 7.3 per cent from 8.6 per cent last year.

Industrial performance has further deteriorated as reflected in the decline of the index of industrial production (IIP) by 5.1 per cent, y-o-y, in October 2011. This was mainly due to contraction in manufacturing and mining activities. The contraction was particularly sharp in capital goods with a y-o-y decline of 25.5 per cent, reinforcing the investment decline story emerging from the GDP numbers.

Other indicators also suggest a similar tendency, though by no means as dramatic as the IIP. The HSBC purchasing managers' index (PMI) for manufacturing suggested further moderation in growth in November 2011. However, PMI-services index recovered in November from contractionary levels in the preceding two months. Corporate margins in Q2 of 2011-12 moderated significantly as compared with their levels in Q1. The decline in margins was largely on account of higher input and interest costs. Pricing power is evidently declining.

On the food front, the progress of sowing under major rabi crops so far has been satisfactory, with area sown under foodgrains and pulses so far being broadly comparable with that of last year.

Inflation

On a y-o-y basis, headline WPI inflation moderated to 9.1 per cent in November from 9.7 per cent in October, driven largely by decline in primary food articles inflation. Fuel group inflation went up marginally. Notably, non-food manufactured products inflation remains elevated, actually increasing to 7.9 per cent in November from 7.6 per cent in October, reflecting rising input costs. The new combined (rural and urban) consumer price index (base: 2010=100) rose further to 114.2 in October from 113.1 in September. Inflation in terms of other consumer price indices was in the range of 9.4 to 9.7 per cent in October 2011. Reassuringly, headline momentum indicators, such as the seasonally adjusted month-on-month and 3-month moving average rolling quarterly inflation rate, show continuing signs of moderation.

External sector

Merchandise exports growth decelerated sharply to an average of 13.6 per cent y-o-y in October-November from an average of 40.6 per cent in the first half of 2011-12. However, as imports moderated less than exports, the trade deficit widened, putting pressure on the current account. This, combined with rebalancing of global portfolios by foreign institutional investors and the tendency of exporters to defer repatriating their export earnings, has led to significant pressure on the rupee.

As on December 15, 2011, the rupee had depreciated by about 17 per cent against the US dollar over its level on August 5, 2011, the day on which the US debt downgrade happened. In the face of this, several measures were taken to attract inflows. Limits on investment in government and corporate debt instruments by foreign investors were increased. The ceilings on interest rates payable on non‐resident deposits were raised. The all‐in‐cost ceiling for external commercial borrowings was increased. Further, a series of administrative measures that discourage speculative behaviour were also initiated. The Reserve Bank is closely monitoring the developments in the external sector and it will respond to the evolving situation as appropriate.

Fiscal Situation

The central government’s key deficit indicators worsened during 2011-12 (April-October), primarily on account of a decline in revenue receipts and increase in expenditure, particularly subsidies. The fiscal deficit at 74.4 per cent of the budgeted estimate in the first seven months of 2011-12 was significantly higher than 42.6 per cent in the corresponding period last year (about 61.2 per cent if adjusted for more than budgeted spectrum proceeds received last year). The likely slippage in this year’s fiscal deficit has inflationary implications.

Money, Credit and Liquidity Conditions

The y-o-y money supply (M3) growth moderated from 17.2 per cent at the beginning of the financial year to 16.3 per cent on December 2, 2011, although still higher than the projected trajectory of 15.5 per cent for the year. Y-o-y non-food credit growth at 17.5 per cent on December 02, 2011, however, was below the indicative projection of 18 per cent.

Consistent with the stance of monetary policy, liquidity conditions have remained in deficit during this fiscal year. However, the deficit increased significantly beginning the second week of November 2011. The average borrowings under the daily LAF increased to around ` 89,000 crore during November-December (up to December 15, 2011) from around `49,000 crore during April-October 2011. The Reserve Bank conducted open market operations (OMOs) on three occasions in November-December 2011 for an amount aggregating about ` 24,000 crore to ease liquidity conditions.

There are currently no significant signs of stress in the money market. The overnight call money rate is stable around the policy repo rate and liquidity facilities such as marginal standing facility (MSF) remain unutilised. However, in view of the fact that borrowings from the LAF are persistently above the Reserve Bank's comfort zone, further OMOs will be conducted as and when seen to be appropriate.

Outlook

Global growth for 2011 and 2012 is now expected to be lower than earlier anticipated. Increased strains in financial markets on the back of growing concerns over euro area sovereign debt, limited monetary and fiscal policy manoeuvrability, high unemployment rates, weak housing markets and elevated oil prices are all contributory factors. These factors have also contributed to moderating growth in the EMEs. As a consequence of all-round slower growth, inflation has also started declining, both in advanced countries and EMEs.

On the domestic front, agricultural prospects look promising on the back of expected record kharif output and satisfactory progress on rabi sowing. However, industrial activity is moderating, driven by deceleration in investment, which is a matter of serious concern. Overall, the growth momentum in the economy is clearly moderating. Further, considering the global and domestic macroeconomic situation, the downside risks to the Reserve Bank’s growth projection, as set out in the SQR, have increased significantly.

Between the First Quarter Review (FQR) and the SQR, while non-oil commodity prices had declined significantly, the rupee too had depreciated sharply. Consequently, the headline inflation projection at 7 per cent for March 2012, as set out in the FQR, was retained in the SQR. With moderation in food inflation in November 2011 and expected moderation in aggregate demand and hence in non-food manufactured products inflation, the inflation projection for March 2012 is retained at 7 per cent.

The Reserve Bank will make a formal numerical assessment of its growth and inflation projections for 2011-12 in the third quarter review of January 2012.

Guidance

While inflation remains on its projected trajectory, downside risks to growth have clearly increased. The guidance given in the SQR was that, based on the projected inflation trajectory, further rate hikes might not be warranted. In view of the moderating growth momentum and higher downside risks to growth, this guidance is being reiterated. From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth.

However, it must be emphasised that inflation risks remain high and inflation could quickly recur as a result of both supply and demand forces. Also, the rupee remains under stress. The timing and magnitude of further actions will depend on a continuing assessment of how these factors shape up in the months ahead.

source