India, Macroeconomic Situation

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Reserve Bank of India

India - Macroeconomic Situation Assessment and Prospects
Indian Merchants’ Chamber Mumbai
June 19, 2012
Dr. Duvvuri Subbarao Governor Reserve Bank of India

1

India Macroeconomic Situation
Cause for Concern?

2

India - Macroeconomic Situation
Trends in Growth Rate
Long-Term Trend
10.0 9.0 8.0 7.0 6.2 Per cent 8.5 5.6 8.0 Percent 7.5 7.0 6.5 6.0 5.5 5.0 6.5 8.7 7.5 10.0 9.5 9.6

Recent Trend

9.0

6.0
5.0 4.0 3.0 2.0 1.0 0.0

3

India Growth Story
What drove India’s growth in the pre-crisis period and what explains the current moderation?

4

What is the inflation story?
Year-on-Year Inflation Rates
11

9

7 per cent

5

3

1

-2 Oct/09 Oct/10 Apr/10 Apr/11 Oct/11 Apr/12 Jan/10 Jan/11 Jan/12 Jul/10 Jul/11

WPI - Headline

WPI- Non-food Manufactured Products

5

Moderation in WPI not transmitted to CPI
Year-on-Year Inflation Rates
11

10

per cent

9

8

7

6
Jan/12 Mar/12 Feb/12 May/12 Apr/12

WPI - Headline

CPI (New)- Combined

6

What is driving Inflation?
• Food (structural) • Fiscal deficit • Demand pressures • Commodity prices + depreciation 7

What has RBI done to control inflation?

8

Has RBI succeeded in controlling inflation?

9

Has RBI’s tight monetary policy hurt growth?

10

Is it the high interest rate that is inhibiting investment? Real Weighted Average Lending Rate (Per cent)
9 8 7 6 5 4 3 2 1 0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 18 16 14 12 10 8 6 4 2 0

Growth in Private Fixed Capital Formation (Right Scale)

Real Weighted Average Lending Rate (Left Scale)

Growthin Private Fixed Capital Formation (Per cent)

Real Weighted Average Lending Rate and Growth in Private Fixed Capital Formation

11

If inflation is caused by supply side pressures, is tight monetary policy an appropriate response?

12

What is required to revive growth?

13

How much has the rupee depreciated and why?
Month-wise Trend in Rupee-dollar Exchange Rate and REER 6 Currency 30 120 118 35 116 114 112 45 110 108 REER

Nominal Exchange Rate

40 Rs per US$

50
55

106 104 102

60 May-11 May-12 Mar-12 Apr-11 Jul-11 Feb-12 Apr-12 Oct-11 June 2012 (so far) Nov-11 Dec-11 Aug-11 Sep-11 Jun-11 Jan-12

100

Rs/US$

REER 6 Currency (RHS)

14

What is causing rupee depreciation?

15

Is the rupee depreciation entirely due to global factors?

.
5.0
0.0

Depreciation/Appreciation of BRICS Currencies (June 12, 2012 over End-July 2011) 1.0

-5.0

Per cent

-10.0

-15.0 -16.2 -20.0 -20.6 -25.0 -24.4 -20.7

-30.0

Brazilian Real

South African Rand

Chinese Yuan

Russian Ruble

Indian Rupee

16

What has RBI done to contain the movement in the exchange rate?

17

What is RBI’s policy on exchange rate?

18

What drives the exchange rate?

19

Why 2012 is not 1991?

20

Is there a new normal for inflation?

21

Has India’s potential growth rate declined?

22

What are the risks to the growthinflation outlook?

23

Is the “India Growth Story” still credible?

24

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