The Reserve Bank of India released its Annual Report for 2012-13, a statutory Report of its Central Board of Directors. It covers (i) the assessment of the macroeconomic performance during 2012-13 and the prospects for 2013-14, and (ii) the working and operations of the Reserve Bank and its financial accounts for the year 2012-13.
"Growth decelerated further in 2012-13 to a 10-year low of 5.0 per cent. The slowdown also became more pervasive across sectors, including services. Growth had averaged 8.8 per cent during 2005-06 to 2010-11, despite a low of 6.7 per cent in 2008-09 due to the external shock. The subsequent slowdown was primarily exacerbated by structural bottlenecks and governance issues, although high infl ation, monetary tightening and global factors also played a role, " RBI said in its annual report.
RBI said "In terms of industrial performance, mining output contracted for the second consecutive year, as structural constraints came to fore with the clampdown on illegal mining and an inadequate compensatory supply response in the short run amid unclear regulatory environment. Mining of coal and iron ore were particularly affected and the consequent coal shortages spilled over as an input supply constraint for the power sector, adversely impacting both its current output and investments. Manufacturing output nearly stagnated, recording a dismal 1.0 per cent growth y-o-y during 2012-13, as structural constraints and governance issues clogged production activity. Growth also slowed due to cyclical factors in both external and domestic demand. Subdued growth in world trade kept export demand low."
In the annual report, RBI stated "The negative output gap that emerged with growth staying below potential and past monetary tightening helped moderate headline wholesale price index (WPI) infl ation towards the end of the year. Headline infl ation, which had risen sharply in H2 of 2009-10 to reach double digits had prompted Reserve Bank to assume an anti-inflationary monetary policy stance. As infl ation averaged close to double digits during 2010-11 and 2011-12, the Reserve Bank persisted with this stance. During January 2010 and October 2011, monetary policy was tightened through a cumulative increase in effective policy rate by 525 basis points (bps) (from reverse repo rate of 3.25 per cent to repo rate of 8.5 per cent) and an increase in the cash reserve ratio (CRR) by 100 bps from 5.0 per cent to 6.0 per cent. Monetary tightening was spread over an extended period, as policy rates had to be raised from the low levels that they reached consequent to the crisis-driven stimulus and infl ation expectations remained elevated.":
RBI said, "The Reserve Bank cut the repo rate by another 25 bps to 7.25 per cent in early May 2013 in continuation of its growth-supportive monetary policy stance. However, the Federal Reserve Chairman’s comments subsequent on May 22, indicating likely tapering of quantitative easing (QE) altered global fi nancial conditions in a signifi cant way. It triggered global bond sell-offs that generated large capital outflows from emerging markets, including India, and imparted signifi cant downward pressures on emerging market currencies across the world. Considering the global and domestic macro-fi nancial conditions and the risks to the CAD, the Reserve Bank paused in its mid-quarter review on June 17, 2013. Financial market pressures exacerbated after further indications from the Fed that it could completely wind down QE by the middle of 2014 precipitating sudden stop and a reversal of portfolio investment flows.
With continued capital outfl ows, mounted concerns over the fi nancing of the CAD during 2013-14. Amid these strains, the rupee depreciated by 7.5 per cent against the US dollar during May 22–July 15 and large volatility was observed in the foreign exchange market. There have been signifi cant FII outfl ows of about US$ 14.6 billion during May 27 to August 9, 2013 which extended sharp downwards pressure on exchange rate."
'The strategy to restrain domestic liquidity had the immediate impact of stabilising the rupee, although interest rates in the money and debt markets rose. During July 15-29, the rupee appreciated by 1.3 per cent. Against this backdrop, the Reserve Bank continued to hold policy rates and its stipulation on reserve requirements in its First Quarter Review on July 30, 2013. In its forward guidance it indicated its intention to roll back the liquidity tightening measures in a calibrated manner as stability is restored to the foreign exchange market, so that the monetary policy could revert to supporting growth with continued vigil on infl ation.Post-policy review, the rupee came under fresh pressure and it depreciated by 3.0 per cent within two days till end-July 2013," RBI said in annual report.
India Infoline Research Team / 15:28, Mar 13, 2015
Markets are now reinforcing the perception of an early interest rate hike by US Federal Reserve, with consensus calling for the hike taking place in June, when compared with the prior expectations of a hike in September.