The Reserve Bank of India's Annual Report, a statutory publication issued by the bank's board, for 2009-10, was released recently. While a large part of the report deals with the central bank's working, including its accounts, its appeal to a broader audience lies in it being at once a communication channel as well as a reference book on the bank, its conduct of monetary policy and its assessment of the broader economy.
Analysing the broad economic and financial trends in the post-crisis period, the RBI notes that the domestic macroeconomic environment changed significantly over four distinct half-yearly phases, beginning the second half of 2008-09. The economy decelerated in the second half of 2008-09. The weakness continued in the first half of 2009-10.
The RBI had promptly introduced conventional and non-conventional measures to limit the impact of the global crisis.
In the second half of 2009-10, there was a robust recovery ahead of the global recovery. However, food inflation turned out to be more persistent than anticipated. Rising and increasingly generalised inflation prompted a calibrated withdrawal of stimulus measures introduced earlier. In the first four months of 2010-11, headline inflation has remained at or close to double digits. Monetary policy has had to shift its focus to inflation from recovery. India, having avoided a financial crisis, is in a position to aim for double-digit growth provided there are steps towards fiscal consolidation and further structural reforms. Demographic factors favour India.
The agricultural sector was more resilient in the face of a deficient monsoon in 2009-10 than on previous occasions.
The impact of deficient monsoons on growth is weakening whereas the impact on inflation is significant.
The average growth rate of food production at 1.6 per cent during 1990-2010 lagged behind the average population growth of 1.9 per cent.
The aggregate savings rate moderated in 2008-09, reflecting a sharp fall in public sector savings on account of the impact of the stimulus measures.
There was a large divergence between Wholesale Price Index-based inflation and Consumer Price Index-based inflation. Also, inflation varied from State to State.
There is a case for better monitoring the futures market activities, given the influence they may have on inflation conditions. However, the relationship between the futures market and the spot commodities market, though scrutinised many times, has not led to unambiguous conclusions.
Monetary policy will be less effective in tacking inflation caused by supply side shocks.
Since November 2009, inflation has become more generalised and, hence, required appropriate monetary action to anchor inflationary expectations.
Persistent large fiscal deficit has several well known adverse consequences that are more likely to be seen over the medium-term. Hence, there must be a credible fiscal consolidation strategy to bring down the deficit.
Despite lower trade deficit, the decline in invisibles led to a higher current account deficit of 2.9 per cent in 2009-10.
Capital flows have been moderating in the initial months of the current year and subsequently lifting stock indices to near record highs.
The advanced countries are likely to persist with low interest rate policies and India's growth prospects are well recognised. Hence, capital flows to India may accelerate and will have to be managed.
