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10 Movements In Key Policy Rates In India Effective Since Reverse Repo Rate Repo Rate 19 Mar'10 20 Apr'10 24 Apr'10 02 Jul'10 27 Jul'10 16 Sep'10 02 Nov'10 25 Jan'11 17 Mar'11 03 May'11 16 Jun'11 26 Jul'11 16 Sep'11 11 times since March ’10, the macroeconomic numbers proved those predictions wrong. With inflation continuing to be a burgeoning worry, the RBI delivered 25 basis points (hundred basis points make a per cent) hike in the repo rate – the rate at which banks borrow from the central bank. Thus, the 12th interest rate hike led the repo rate to increase by a cumulative 350 basis points since March ’10; it now stands at 8.25% and the reverse repo rate – the rate at which banks park their excess liquidity with the central bank - now stands at 7.25%. After announcing the monetary measure, the RBI said that since its policy review of 26th July, the global macroeconomic outlook has worsened. “There is a growing consensus that sluggishness will persist longer than expected,” said the Reserve Bank of the country in its policy release. “Domestically, even as many indicators point to moderating growth, both headline and non-food Beyond Market 10th Oct ’11 3.50 (+0.25) 3.75 (+0.25) 3.75 4.00 (+0.25) 4.50 (+0.50) 5.00 (+0.50) 5.25 (+0.25) 5.50 (+0.25) 5.75 (+0.25) 6.25 (+0.50) 6.50 (+0.25) 7.00 (+0.50) 7.25 (+0.25) 5.00 (+0.25) 5.25 (+0.25) 5.25 5.50 (+0.25) 5.75 (+0.25) 6.00 (+0.25) 6.25 (+0.25) 6.50 (+0.25) 6.75 (+0.25) 7.25 (+0.50) 7.50 (+0.25) 8.00 (+0.50) 8.25 (+0.25) Cash Reserve Ratio (CRR) 5.75 5.75 6.00 (+0.25) 6 6 6 6 6 6 6 6 6 6 Source: Reserve Bank of India Note: Figures outside the parentheses are in percentage and those in parentheses indicate change in policy rates in percentage points. manufactured products inflation are at uncomfortably high levels. Crude oil prices remain high. Food price inflation persists, notwithstanding a normal monsoon,” the RBI’s policy release added. The RBI is hoping that stabilization of energy prices and moderating domestic demand would ease inflationary pressures towards the later part of 2011-12. However, in the current scenario, with the likelihood of inflation remaining high for the next few months, rising inflationary expectations continue to be a key risk. “This makes it imperative to persevere with the current anti-inflationary stance,” said the RBI, justifying the ongoing hawkishness it has been maintaining. In the readings for the month of August, inflation with respect to primary articles and fuel groups edged up significantly. The y-o-y non-food manufactured products’ inflation rose to around 7.7% in August ’11 from 7.5% in the month of July ’11, suggesting the prevalence of persistent demand pressures. Oil marketing companies raised the price of petrol by `3.14/ litre with effect from 16th September. This, according to the RBI, will have a direct impact of 7 basis points on the WPI, in addition to the indirect impact with a lag. In the RBI’s view, the latest repo rate hike is expected to reinforce the impact of past monetary policy actions to contain inflation and anchor inflationary expectations. In its guidance, the RBI has said that the monetary tightening carried out so far has helped in containing inflation as well as anchoring inflationary expectations to a certain extent, though currently both remain at levels that are beyond the Reserve Bank’s comfort zone. The central bank reiterated that as the monetary policy operates with a lag, the cumulative impact of the policy actions should now be increasingly felt in further moderation in demand as well as the reversal of the inflation trajectory towards the later part of 2011-12. “As such, a premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. It is, therefore, imperative to persist with the current anti-inflationary stance,” said the central bank. And the global developments are no less crucial. Less than two weeks from the RBI’s quarterly review in July, ratings major Standard & Poor’s downgraded the United States to AA+ from its prized AAA rating it held earlier. And then the concerns over the sovereign debt problem in the Euro zone have added further uncertainty to the prospects of an economic recovery. In the second quarter (April to June) It’s simplified...
of 2011, the global economy has slowed down considerably. On 20th Sept ’11, the International Monetary Fund (IMF) unveiled the World Economic Outlook (WEO) where it said that growth, which had been strong in the year 2010, decreased in the year 2011. The IMF forecasted world growth to be about 4% in 2011 and also 4% in 2012. This is down from 4.5% for both years that the IMF had predicted in April. “Now, 4% may not sound too bad, but, again, the recovery is very unbalanced,” Olivier Blanchard, International Monetary Fund’s Economic Counsellor and Director of Research Department said at the WEO briefing. “For the year 2011, we see growth of 6.4% for emerging market countries, which is a good number. But only 1.6% for advanced economies,” Blanchard added. With uncertainty being the name of the game across the global markets the sharp increase in financial volatility has been prevalent for some time now. “What has happened is that the markets have become more sceptical about the ability of policymakers to stabilize the government’s public debt,” explained IMF’s Economic Counsellor Blanchard. Worries have spread from countries at the periphery of Europe, to countries in the core of Europe, and then to other nations. Even economies like Japan and the United States of America have not been spared. Worries about sovereigns have translated into worries about the banks that are holding these sovereign bonds, mainly in Europe. And these worries have resulted in a partial freeze of financial relations with banks that are keeping high levels of liquidity as well as tightening monetary lending. A day after the WEO, the IMF issued its Global Financial Stability Report, where José Viñals, IMF’s Financial Counsellor and Director of the Monetary and Capital Markets department said that since IMF’s previous report, financial stability risks have increased substantially, reversing the progress that had been made over the previous three years. “So we are back in the danger zone,” said Viñals. As we have moved into a new political phase of the crisis, several shocks have recently buffeted the global financial system, including unequivocal signs of a broader global economic slowdown, the French market turbulence in the Euro zone and not to forget the credit downgrade in the US. “This has thrown us into a crisis of confidence, which is being driven by three main factors: weak growth, weak balance sheets and weak politics,” maintained Viñals. “Developments in the global economy over the past few weeks are a matter of serious concern,” said the RBI. Growth momentum is weakening in the advanced economies amidst heightened concerns that recovery may take longer than expected. “Although India’s exports have performed extremely well in the recent period, this trend is unlikely to be sustained in the face of weakening global demand,” the Reserve Bank of India warned. “This, combined with the slowing down of domestic demand, to which the monetary policy stance is also contributing, suggests that risks to the growth projection for the year 2011-12 made in the July review are on the downside now,” said the RBI. But global factors have already pushed the Indian rupee to a 28-month low at 49.90 a dollar and also drawn the RBI to step in and intervene in order to stem the rupee’s free-fall, which shed nearly 5% against the US dollar in just 10 trading sessions. The gravity of the situation is justified by the fact that the RBI did not intervene in the foreign exchange markets for nine successive months until July. Subir Gokarn, Deputy Governor of the RBI, during his visit to the US, informed a television channel that volatility in the currency exchange rate had become ‘a part of the game’ and the central bank would intervene to the excessive volatility in the currency under control. But in the middle of moderating growth, higher interest rates and stubborn inflation, a volatile Indian rupee would simply augment the woes of the RBI as much as to that of India Inc. And for the monetary policy in the ensuing quarters, the central bank’s action will depend heavily upon a host of ‘known unknowns’ like further developments in domestic growth and inflation dynamics, developments in the global financial situation as well as movement of commodity prices at the international level, to mention a few. In all probabilities, the wider market expectation of aggressive monetary policy easing, beginning this year, appears to be thoroughly misplaced for the momenT. Beyond Market 10th Oct ’11 It’s simplified... 11
Page 1: The IMF, in its World Economic Outl
Page 4 and 5: 4 PROPHECY OF DOOM The repercussion
Page 6 and 7: 6 The IMF, in its World Economic Ou
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