Thursday, April 9, 2015

Monetary Policy Report - April 2015

Macroeconomic Outlook

The prospects for growth in 2015-16 have improved for the followings -
  • The broad-based decline in retail inflation since September 2014
  • Plans announced in the Union Budget 2015-16 to step up infrastructure investment
  • Depressed Commodity prices
  • Upbeat financial market conditions

Retail inflation is projected to remain below 6 % in 2015-16, within the target set for January 2016 (Inflation targeting). 

Persisting slack in the economy and restrained input costs should sustain dis-inflationary impulses, unless -
  • Disrupted by reversal in global commodity prices, and/or,
  • Deficiency in the South-west monsoon

Outlook for Inflation

CPI Inflation will remain below the target of 6 % for January 2016, hovering around 5 % in the first half of 2015-16, and a little above 5.5 % in the second half.

Uncertainties surrounding commodity prices, monsoon and weather-related disturbances, volatility in prices of seasonal items and spillovers from external developments through exchange rate and asset price channels are reflected in a 70 % around the baseline inflation projection of 5.8 % for Q4 of 2015-16.

Outlook for Growth

Real GDP growth for 2014-15 was projected by RBI at 5.5 %. The Central Statistical Office (CSO)'s provisional estimates of GDP (base: 2004-05) tracked projected path up to Q2 of 2014-15.

The new GDP data (rebased to 2011-12) released by the CSO at the end of January 2015 and on February 9, came as a major surprise as it produced significantly higher growth at constant prices

Data revisions and their after-effects are not unique to India, but the magnitude of the gap in real GDP growth rates between the old and the new series for 2013-14 and 2014-15 has complicated the setting of monetary policy. Undoubtedly, the new GDP data embody better coverage and improved methodology as per international best practices. Yet these data cloud an accurate assessment of the state of the business cycle and the appropriate monetary policy stance.

Gross Value Added (GVA)

GVA + taxes on products - subsidies on products = GDP

Growth at basic prices for 2015-16 is projected at 7.8 %, with risks evenly balanced around this baseline forecast. For 2016-17, real growth in GVA at basic prices is projected at 8.1 %.

Balance of Risks

The baseline paths projected for growth and inflation are subject to realization of a set of underlying assumptions, under plausible risk scenarios, as below -
  • Sharp Increase in Crude Oil Prices - Global crude oil prices are assumed to increase gradually over the forecast horizon in the baseline projection.
  • Below Normal Monsoon in 2015-16 - As against the normal monsoon assumption in the baseline, there is a risk of monsoon turning out to be deficient in 2015.
  • Depreciation of the Rupee - Uncertainties surrounding the exchange rate persist. 
  • Easing of Food Inflation - Headline inflation could also undershoot from the baseline, if food inflation moderates by more than what is envisaged
  • Crude Oil Price Declining Further - If crude oil prices decline below the baseline by USD 15-20 per barrel in the near-term as a result of excess supply conditions / low global demand in a stable geo-political environment - inflation would come down.
  • Revision in CSO's GDP Estimates - Considerable uncertainty surrounds the advance estimates of GDP growth for 2014-15 and information on real economic activity to Q4 is expected to be better captured in the revised estimates, which would be released around the end of May 2015.
  • Pick-up in Investment Demand - If the boos to investment expenditure announced in the Union Budget for 2015-16 helps in crowding in private investment, and correspondingly, if investment demand picks up, GDP growth will rise considerably.

Revision of Consumer Price Index (CPI)

Beginning January 2015, the CSO revised the base year of the CPI to 2012 (from 2010 = 100). The weighting patterns of the revised series is based on the 2011-12 Consumer Expenditure Survey (CES 2011-12), of the National Sample Survey Office (NSSO), which is more representative and recent than the CES 2004-05 used for the old series.

[Compiled from RBI's Monetary Policy Report - April 2015]

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