Central bank pegs GDP growth rate for current fiscal at 8% against government’s projection of 9%
The Reserve Bank of India (RBI) in its monetary policy for 2011-12 today raised its short-term lending (repo) rate by 50 basis points (bps) to 7.25% and the short-term borrowing rate (reverse repo) by 50 basis points to 6.25%. This is the ninth time that the central bank has increased its key interest rates since March 2010.
The apex bank has also increased the savings bank rate by 50 basis points to 4% from the current rate of 3.5%, a move that will give higher returns to depositors in the wake of continuing high inflation. The last time the savings rate was raised in April 1992 and since March 2003 it has been unchanged at 3.5%.
However, the RBI has lowered the economic growth projection to 8% for the current fiscal compared to 9% estimated by finance ministry. The economy grew by 8.6% in 2010-11.
RBI governor D Subbarao announced these measures as part of the annual credit policy to contain inflation, which is hovering around 9% and sustain economic growth in the medium-term.
Factoring in the many headwinds such as high inflation, which stood at 8.98% in March and rising crude and commodity prices, the governor pegged the gross domestic product (GDP) growth lower by over 1% between 7.4% and 8.5% for the current fiscal.
"High oil and other commodity prices and the impact of the RBI's anti-inflationary monetary stance will help moderate growth," Mr Subbarao said.
"Based on the assumption of a normal monsoon, and crude oil prices averaging $110 a barrel over the fiscal 2011-12, our baseline projection of real GDP growth for 2011-12, for policy purposes is around 8%," he added.
Making a highly ambitious inflation management objective, the policy aims at bringing down inflation to 4% to 4.5% for the full fiscal, with a medium-term objective of 3%.
The governor, however, said, "RBI's baseline inflation projections are that inflation will remain elevated, close to the March 2011 level (8.98%) over the first half of FY11-12 before declining."
To contain volatility in the overnight inter-bank rates, RBI has decided to open a new borrowing facility for banks under the marginal standing facility (MSF) to be effective from 7th May. The rate of interest on this facility will be 100 bps above the repo. The banks can borrow up to 1% of their net demand and time liabilities (NDTL) from this facility.
As per the above norms, the difference between the reverse repo and MSF will be 200 bps. While the repo rate will be in the middle, the reverse repo rate will be 100 basis points below it, and the MSF rate 100 bps above it, the governor said, adding the MSF rate gets calibrated at 8.25%.
On the expected policy outcome, the governor said, the policy actions are aimed at "first containing inflation by reining the demand side pressures, anchoring inflation expectations and sustaining growth in the medium term by containing inflation...going forward, the RBI will continue with its anti-inflationary stance."
The Planning Commission has endorsed RBI's hawkish policy of hiking key rates by half a percentage point saying this would contain inflation.
"Both (raising key and saving interest rates) are very good decisions. All over the world the resurgence of inflation is a matter of concern," Planning Commission deputy chairman Montek Singh Ahluwalia said.
"When inflation goes up, it is sensible to take steps early to contain inflation. I am very glad that RBI has given a clear signal going beyond the usual 25 bps (revision) to something more substantial," he added.
Mr Ahluwalia also applauded the central bank's decision to raise saving interest rate from 3.5% to 4% and said that it could also be decontrolled.
Most bankers felt there was no option but to increase interest rates as the cost of borrowing funds has also gone up, with the RBI hiking the short-term lending rates.
"For a bank like ours, it (hike in interest rate on savings deposits) does (augurs well)... (People are) keeping Rs9.5 lakh crore at home in cash because of the low interest rate (on savings deposits). They are not comfortable in committing money in long-term deposit," SBI chairman Pratip Chaudhuri told reporters after the post-policy meet with the RBI governor.
Describing the annual monetary policy announced by RBI governor D Subbarao as a progressive one, Ernst & Young India's Ashvin Parekh said, "We have almost reached a point where inflation has become unmanageable and RBI has clearly indicated that bringing down inflation to a comfortable level is its top priority."
Fitch Ratings India's DK Pant opined that as inflation has been adamantly high all these months, the RBI has taken a right step to yank it down by compromising on growth, which is already visible from recent months' factory output data.
Crisil chief economist DK Joshi said: "The policy basically reflects that inflation is a much larger problem as RBI's efforts in controlling it have not had the desired effect.
We have come to a stage where managing inflation is more important, even at the cost of sacrificing growth."
The next quarterly review of the monetary policy will take place on 26th July.
The IMF says growth and recovery is taking root in global markets, but it advises financial policymakers to be cautious as high unemployment, rising commodity prices, inflation and increasing oil prices could slow growth in the medium term
The International Monetary Fund (IMF) in its annual World Economic Outlook (WEO) report has asserted that the global economy is indeed on a path of recovery, but it has cautioned about the gathering clouds on the horizon that could likely dampen progress. The IMF expects an economic growth rate of 4.5% for both 2011 and 2012. While the developed economies are growing at 2.5%, it estimated that the developing world has picked up pace to reach an average rate of 6.5%.
However, there are many concerns that threaten the recovery -
Reserve Bank of India (RBI) governor Duvvuri Subbarao expressed just as much during his recent visit to Washington, for the spring meetings of IMF and World Bank. "The global recovery may be jeopardised by a sustained rise in oil prices," he said. "Speculative movements in commodity derivative markets are also causing volatility in prices." Whether the G-7 and OPEC heed his warning by addressing the supply-side economics remains to be seen, but the mood on the street remains far from optimistic.
Dalal Street is waiting to see the final quarter results from India Inc. before pushing up the sails. Infosys has set off disappointment in the market and much will be made out of the numbers that Tata Consultancy Services presents on 21st April. Equally important, if not more, will be the performance of the manufacturing industry, as they will be a more precise indicator of domestic economic health. Also, the impact of high oil and commodity prices will be captured in these performance numbers.
There are signs of concern in the just-released inflation estimate for March. Inflation rose to 8.98% from 8.31% in February, on the back of increasing manufacturing and fuel costs. With inflation rooted above 8% over the past 14 months, pricing pressures are ensuring that inflation remains high-recently car and garment manufacturers passed on price hikes to consumers, affirming this trend.
It is widely believed that revised inflation figures for March might edge into double figures after the rate for January was revised from 8.23% to 9.35%. With the RBI's efforts to fight inflation not yielding the desired results, markets are gearing up for a 0.5% increase in the inter-bank rate when the central bank issues its monetary guidance in the first week of May.
In a persistent bid to fight inflation, the RBI has already changed the rate eight times in the last 13 months, amounting to a 3.5% hike. "Underlying inflationary pressure is a concern and inflation is the most important problem in the short term," said the deputy chairman of the Planning Commission, Montek Singh Ahluwalia. "They (RBI) have all the flexibility and they should use all the flexibility to control inflation," he added, clearly suggesting that the bank ought to raise rates.
Monetary tightening is a pan Asia trend-China's inflation hit a 32-month high in March, ensuring that the People's Bank of China will continue to squeeze money supply. All of these actions are likely to slow down overall growth in the region as public policy battles rising prices. The IMF's outlook also acknowledged the role of foreign investment funds in the emerging Asian markets that is causing the overheating.
The delay in structural reforms has meant that most of the capital flows to the East have come in the form of portfolio investments, while FDI has declined. Inherently, this is a situation that lends itself to volatility. With oil likely to remain above $100 per barrel, markets may be dealing with more instability through the rest of 2011.
(The writer is a business consultant to large clients on financial processes, process re-engineering and improvement.)
While the HSBC PMI index suggests an expansion in manufacturing activity, government data revealed through the IIP suggests a slowdown in the industrial sector
On 11th April, the Central Statistical Organisation (CSO) of the government released the industrial output data-as measured by the Index of Industrial Production (IIP)-for the month of February 2010. The data showed that industrial growth in February was slower at 3.6% compared to 15.1% in the month a year ago. The government attributed the low numbers to contraction in the manufacturing and mining sectors.
The CSO also revised the IIP for January to 3.95% from the earlier estimate of 3.7%. The decline in fact started in November 2010 (2.7%) and continued through December (2.53%) and thereafter.
The last major jump in industrial production happened in October last year when it expanded by 11.29%. With the country's industrial growth falling from 11.29% in October 2010 to a meagre 3.6% in February this year, this is a sure indicator of a slowdown.
Consequently, overall, the IIP for April 2010-February 2011 period recorded a slippage to 7.8% from 10% in the previous corresponding period.
However, another industrial growth barometer, the HSBC Markit Purchase Managers' Index (PMI)-a private survey of purchasing executives in over 500 manufacturing companies- pegged manufacturing growth at 57.9 for March 2011, unchanged from the previous month. The survey added that despite inflationary pressures in March, the country's manufacturing output has remained intact.
Commenting on the India Manufacturing PMI survey, Leif Eskesen, chief economist for India and ASEAN at HSBC said, "The momentum in India's manufacturing sector held up well in March, suggesting that growth is not an immediate concern. Output growth kept up the pace and the inflow of new orders accelerated, holding promise of a continued strong momentum in output in the months ahead."
While the manufacturing PMI for February was 57.9, it was 56.8 in January, 56.7 in December 2010 and 58.4 in November. A reading above 50 indicates expansion while that below 50 indicates contraction. As the PMI has remained in the positive zone since last November, it indicates that manufacturing growth is still strong.
Looking at the PMI numbers for March 2011, analysts opine that the India's manufacturing sector has benefitted from the initiatives provided by the government in the aftermath of the global slowdown in 2008 and 2009.
On the other hand, optimism expressed by chief economic advisor Kaushik Basu saying that IIP numbers for April will rebound after remaining low in March, looks a bit far-fetched. Besides, comments by Planning Commission deputy chairman Montek Singh Ahluwalia that more than the anticipated growth in the farm sector will make up for the shortfall in industrial output raises many questions.
The IIP numbers are based on broad-based data from government sources, which is often revised later, while PMI presents a more accurate view of the country's manufacturing sector as it is based on a survey of purchasing executives from the manufacturing sector.
Looking at other economic indicators, India's headline inflation for February rose marginally to 8.31% from 8.23% in the previous month. With the headline inflation staying above the 8% mark, the government has been forced to revise the comfort level and has now stated that inflation for March would be around 8.5% (inflation figures for March will be released later this week).
Besides, in a bid to tame rising prices, the Reserve Bank of India (RBI) in its mid-quarter review of the monetary policy last month raised short-term lending and borrowing rates by 25 basis points. This was the eighth time that the central bank raised the rates since March last year.
While the RBI is doing its best to curb liquidity in the system, commerce and industry minister Anand Sharma has voiced concern saying, "I hope that credit will continue to be made available freely, liberally and on good terms to the industry, because investments must go in for capacity building and for additional capacity creation, which the industry is committed to do."