Indian economy at point of inflexion, RBI sounds alarm bells

There is increasing evidence that the US slowdown is spreading via the trade and financial channels.

MUMBAI:The reserve Bank of India today sounded alarm bells on the state of the country’s economy.

Starting that aggregate supply conditions in the Indian economy have shown resilience in the second quarter of 2008-09 in the face of a deteriorating global macroeconomic and financial environment, the Central Bank said: “There are, however, growing indications that the underlying economic cycle is turning in tune with global economic developments and that domestic economic activity is straddling a point of inflexion.”
The highlights of the overall assessment as presented in the mid-year review by RBI Governor D Subbarao are:

• Aggregate demand conditions continue to be mainly investment-driven, although some slackening which set in during the first quarter of 2008-09 appears to have become broad based.
• Reflecting the aggregate demand pressures, key monetary and banking aggregates – money supply, deposit and non-food credit growth – have been expanding during the year so far at rates that are significantly elevated relative to indicative trajectories given in the Annual Policy Statement of April 2008.
• The developments in monetary conditions resulted in a tightening of liquidity conditions in domestic financial markets through the second quarter of 2008-09.
• Signs of deterioration in the fiscal situation appear to be adding to aggregate demand pressures in the economy.
• Domestically, imported inflation pressures have been keeping headline inflation at elevated levels with considerable uncertainty as to where it will peak and when.
• Since the First Quarter Review of July 2008, global economic prospects have weakened further. The global economy is facing the deflationary effects of the financial crisis. There is increasing evidence that the US slowdown is spreading via the trade and financial channels.
• The outlook for the emerging economies remains positive, but uncertainties about their resilience to the global shocks have increased.
• The international financial system is gripped by extreme risk aversion in the wake of spectacular failures among the world's largest financial institutions, including several credited with history and tradition.
• Conditions in global financial markets have worsened with the freezing of inter-bank markets in US and Europe necessitating massive liquidity injection facilities from central banks in these economies, reduction of policy rates, recapitalisation of troubled private banks by governments, coordinated action by European governments to bail out weak banks and guaranteeing of all deposits in the banking system in many countries.
• In the overall assessment, global economic conditions have worsened and the future path of their evolution has turned highly uncertain. The broadening slowdown of economic activity in the advanced economies is beginning to impact the macroeconomic prospects of emerging economies, with those reliant on exports and on international financial markets for external financing needs likely to be the most vulnerable. Inflation remains elevated and a key risk to global economic prospects.
Details of the RBI review can be accessed at: http://rbi.org.in/scripts/Annualpolicy.aspx