MACROECONOMICS AND MONETARY DEVELOPMENTS: 1ST QUARTER REVIEW 1ST QUARTER 2011-2012: Taming Inflation: Inflation risk stays,

growth showed signs of moderation(8%) price pressure is expected to persist in the Q2 as well. Risks to baseline growth and inflation projections may arise from three factors: (1) significant departure of monsoon from normal, (2) a collapse or re-build of global commodity price bubble, and (3) Euro zone debt crisis assuming full-blown proportions. Global Economic Conditions: Recovery at risk with softer growth and inflation surprised advanced economies. High oil and commodity prices, the Middle East political strife, Japanese earthquake, sovereign debt problems and the impasses on the fiscal and debt problems in the US. Global inflation is rising rapidly . Commodity prices showed some decline in the 1st quarter.(but unclear whether transitory) Indian Economy: Output Signs of moderation after acceleration in 2010-11 Growth showed some moderation. Timely arrival and advancement of monsoon. Agricultural growth is expected to stay broadly on track. Aggregate demand: Investment demand slows down, private consumption demand remains strong. External economy: CAD is expected to remain manageable in 2011-12, FDI pick-up augurs well Export momentum and strong invisible receipts lead by software exports. Balance of Payments outlook remains stable oil prices and the pattern of capital flows is likely to impact external balance.

MACROECONOMICS AND MONETARY DEVELOPMENTS: 2nd QUARTER REVIEW 1ST QUARTER 2011-2012: While inflation remains sticky, growth risks add to policy complexity

 growth in 2011-12 is likely to moderate slightly from that projected earlier.

growth risks have increased on account of global headwinds and domestic factors. investment is slowing down The fall in new corporate fixed investment can impact the pipeline investment in coming years The policy choices have become more complex. In this backdrop, the monetary policy trajectory will need to be guided by the emerging growth-inflation dynamics even as transmission of the past actions is still unfolding. the Reserve Bank for the first time is releasing surveys conducted by it along with the Macroeconomic and Monetary Developments, one day ahead of the policy. Global Economic Conditions: Global growth in siege from debt overhang. Prospects for global growth appear to be declining. There have been significant downward revisions in growth projections. Business and consumer confidence have dampened on the back of euro area sovereign debt crisis. significant weakness in the banking sector has re-emerged. Global commodity prices, especially those of metals, have softened but have stayed elevated. the current Brent crude oil price is still over 25 per cent higher than its average for 2010-11.

Indian economy: Output Growth moderating below trend in 2011-12 Agriculture prospects remain encouraging with the likelihood of a record Kharif crop. industrial activity and some services are in moderation. Construction activity has slowed and leading indicators suggest that going forward, services growth may slightly weaken. Aggregate Demand Investment slowdown may impact growth ahead Investment demand is softening as a result of monetary tightening, hindrances to project execution, deteriorating business confidence and slowing global economy.

 Planned corporate fixed investment in new projects declined significantly. Pipeline of investment is likely to shrink, putting growth in 2012-13 at risk. Private consumption remains robust overall as is evident from corporate sales performance. Sales growth continues to be healthy, but profits are under pressure. Fiscal slippages during 2011-12 may complicate the task of aggregate demand management. Key to growth sustainability lies in supporting investment by rebalancing demand from government consumption to public and private investment. External Sector: Widening CAD poses risk if global trade and capital flows shrink. Sharp decline in FII flows in Q2 of 2011-12 has been largely offset by strong FDI flows. Monetary and Liquidity Conditions : Liquidity remains comfortable, credit growth stays above trajectory Base money decelerated as currency growth moderated. Money (M3) growth, however, moderated less sharply and remained above the indicative trajectory as the money multiplier increased. Bank credit growth is presently above the indicative trajectory. increased resource flows from non-banking sources. credit growth is expected to moderate as growth slows Monetary policy has been significantly tightened since February 2010 with an effective increase of 500 bps in policy rates and a 100 bps increase in CRR; but monetary transmission is still unfolding and real interest rates remain low and non-disruptive to growth. Financial Markets : Volatility spillovers to domestic equity and currency markets are contained. Rupee depreciation and the fall in equity indices in Q2 of 2011-12 were comparable to the patterns in most other emerging markets. Price Situation : Inflation risks stay as falling global commodity prices provide limited comfort. Food inflation is likely to stay elevated due to demand-supply mismatches in non-cereals and large MSP revisions. MACROECONOMICS AND MONETARY DEVELOPMENTS: 3rd QUARTER REVIEW 1ST QUARTER 2011-2012: While growth outlook weakens, inflation risks remain:

The slack in investment and net external demand may keep the pace of recovery slow in 2012-13. While in the short run, moderating inflation will provide some space for monetary policy to address growth concerns, in the absence of structural measures to address supply bottlenecks, this will be, at best, a temporary respite. Global Economic Conditions : Global growth moderates, financial market stress rises the euro area could enter into a recession Tightening credit conditions, rising risk premia, deleveraging, weakening growth in the euro area are keeping global financial markets under stress. Indian Economy Output : Global linkages reinforce domestic factors to slow down economy. Agricultural prospects remain encouraging but moderation is visible in industrial activity and some services. Industrial slack has emerged as export and domestic demand has decelerated.

Aggregate Demand : External and investment demand may drag growth. Growth has been impacted by lower external and investment demand There has been a sharp decline in planned corporate fixed investment since H2 of 2010-11 and this trend has accentuated further in Q2 of 2011-12. Private consumption continues to moderate Fiscal reforms, including the Direct Tax Code and the Goods and Services Tax are needed to contain deficits in 2012-13. With a widening current account deficit (CAD), larger fiscal spending could affect growth and stability in the economy. External Sector : CAD risks have amplified as capital flows moderate Early indicators suggest that the current account came under increased pressure during Q3 of 2011-12. Notwithstanding rupee depreciation, exports decelerated

but import demand remained strong, with inelastic demand for oil and rising gold imports. Currencies of other EDEs running CAD came under similar pressures. The composition of capital inflows has shifted in favour of debt, with a rise in the proportion of short-term flows. Monetary and Liquidity Conditions : Monetary growth keeps pace even as money market liquidity tightens. Money market liquidity tightened significantly since November 2011 partly due to dollar sales by RBI. Reserve Bank by injecting liquidity through open market operations, including repos under the LAF. Demand for credit weakened in response to slack in real activity. Supply also slowed down. Monetary policy has been significantly tightened since February 2010 with an effective increase of 525 bps in policy rates and a 100 bps increase in CRR. Financial Markets: Financial markets come under pressure from global spillovers. The sudden stop in equity inflows also impacted investment financing. Call money rates have largely remained within the interest rate corridor and spikes were effectively contained. Price Situation : Inflation is trending down, but upside risks remains significant. sharp decline in food inflation and is broadly in line with the 7 per cent projection for March 2012. Inflation in non-food manufactured products remains persistently high, reflecting input cost pressures, partly resulting from the rupee depreciation that has offset the impact of softer global prices of some commodities. Macroeconomic and Monetary Developments in 2011-12: Macroeconomic challenges warrant careful calibration of monetary policy Growth is likely to improve moderately in 2012-13. While inflation has moderated, risks to inflation are still on the upside. Global Economic Conditions: Global growth likely to remain moderate in 2012

Euro area is entering into a mild recession, while growth and employment conditions in the US are improving. Growth in emerging markets, especially China and India, is slowing beyond what was earlier anticipated. Indian Economy Output: Growth may have bottomed out in Q3 of 2011-12, but recovery ahead likely to be slow. The Reserve Banks own assessment of leading indicators suggests that the 2012 monsoon may be normal. Revival in the industrial sector hinges on the impetus to ease supply-side constraints, especially in the energy and mineral deficits. Aggregate Demand Investment downturn extends, speeding of public investment could crowd-in private investment. The growth slowdown has been driven by a sharp fall in investment, some moderation in private consumption and a fall in net external demand. Decline in saving and investment rates constitute a concern for long-term growth performance. Commitment to cap subsidies to 2 per cent of GDP is a positive step. External Sector: Balance of Payments risks accentuate, warrants caution A wider current account deficit, rising external debt, weakening net international investment position (NIIP) and deteriorating vulnerability indicators underscore the need for greater prudence in external sector and demand management policies. Export growth may weaken despite continued trade diversification as growth in emerging and developing economies slows down. capital inflows have improved in Q4 Monetary and Liquidity Conditions: Liquidity deficit eases on Reserve Bank injecting primary liquidity. declining inflation and growth rates motivated the Reserve Bank to shift to a neutral monetary policy stance since December 2011, leaving policy rates unchanged. The liquidity deficit has turned large since November 2011 due to both structural and frictional factors.

The Reserve Bank injected durable primary liquidity of over `2 trillion through open market operations (OMOs) purchase and a 125 basis point reduction in Cash Reserve Ratio (CRR) to address the structural liquidity deficit. Reserve money growth decelerated in Q4 of 2011-12, reflecting the CRR cuts. Financial Markets: Financial market stress eases but risks remain. Global market sentiments have improved following policy interventions in the euro area and positive data from the US. there are risks of disruptive movements from euro area and financialisation of commodities, especially oil, in the global markets. Price Situation: Inflation path for 2012-13 likely to be sticky. The pricing power of companies has waned with moderation in demand. Primary food inflation reversed after a sharp decline as transitory effects waned Energy prices are likely to remain a significant source of inflation ahead, as suppressed domestic prices of oil, coal and electricity prices are adjusted upwards. Inflation expectations moderated in Q4 of 2012-13 but remain high. With significant upside risks to inflation, monetary policy needs to keep them anchored, while shifting the balance of policy to arrest the deceleration in growth momentum.