FEBRUARY 2013 VOLUME LXVII NUMBER 2 EDITORIAL COMMITTEE M. D. Patra A. B. Chakraborty Brajamohan Misra Gautam Chatterjee Amitava Sardar EDITOR Sanjay Kumar Hansda The Reserve Bank of India Bulletin is issued monthly by the Department of Economic and Policy Research, Reserve Bank of India, under the direction of the Editorial Committee. The Central Board of the Bank is not responsible for interpretation and opinions expressed. In the case of signed articles, the responsibility is that of the author. © Reserve Bank of India 2013 All rights reserved. Reproduction is permitted provided an acknowledgment of the source is made. For subscription to Bulletin, please refer to Section ‘Recent Publications’ The Reserve Bank of India Bulletin can be accessed at http://www.bulletin.rbi.org.in CONTENTS Monetary Policy Statement 2012-13 Third Quarter Review of Monetary Policy for 2012-13 by Duvvuri Subbarao, Governor, Reserve Bank of India 1 Macroeconomic and Monetary Developments Third Quarter Review 2012-13 9 The Fifteenth C. D. Deshmukh Memorial Lecture Welcome Remarks by Duvvuri Subbarao 67 A Revolution in Monetary Policy: Lessons in the Wake of the Global Financial Crisis Joseph E. Stiglitz 94 Vote of Thanks by Deepak Mohanty 95 The First Prof. Tendulkar Memorial Oration Welcome Remarks by Duvvuri Subbarao 97 Vote of Thanks K. C. Chakrabarty 100 Speeches The Outreach Programme Duvvuri Subbarao 101 The Magical World of Mathematics – The Charm, Challenges and Career Prospects K. C. Chakrabarty 105 Financial Inclusion of Urban Poor in India K. C. Chakrabarty 115 Building Financial Capability K. C. Chakrabarty 123 CONTENTS Financial Inclusion & Payment Systems: Recent Trends, Current Challenges and Emerging Issues Harun R Khan 129 Promoting Retail Investor Participation in Government Bonds Harun R Khan 141 Market Risk Analysis G. Gopalakrishna 151 Indian Infl ation Puzzle Deepak Mohanty 159 Random Payment System: Issues of Systemic Relevance for the New Year G. Padmanabhan 168 Current Statistics 177 Recent Publications 211 MONETARY POLICY STATEMENT 2012-13 Third Quarter Review of Monetary Policy for 2012-13 by Duvvuri Subbarao, Governor, Reserve Bank of India Macroeconomic and Monetary Developments Third Quarter Review 2012-13 Third Quarter Review of Monetary Policy 2012-13 MONETARY POLICY STATEMENT 2012-13 Third Quarter Review of demand too is slowing. As regards prospects for agriculture, whether the rabi output will offset the Monetary Policy 2012-13* shortfall in the kharif output is as yet unclear. Lead indicators of service sector activity point to an Introduction expansion in the months ahead, albeit constrained by Since the Second Quarter Review (SQR) of the drag imposed by depressed global demand Monetary Policy in October 2012, headwinds holding conditions. back the global economy have begun to abate gradually, 3. Headline wholesale price infl ation, led by non- although sluggish conditions prevail. In the US, food manufactured products infl ation, has softened activity gathered momentum in Q3 of 2012 but this is through Q3, providing some relief from the unlikely to have been sustained in Q4. While a political persistence that dominated the fi rst half of the year. consensus to avert the ‘fi scal cliff’ has calmed fi nancial On the other hand, food infl ation has edged up, markets, how the debt ceiling is managed will be pushing up consumer price infl ation in turn. Lead crucial in shaping market sentiment on the way indicators such as weaker pricing power of corporates, forward. The euro area economy is threatened by excess capacity in some sectors, the possibility of continuing contraction, notwithstanding the liquidity international commodity prices stabilising as assessed fi rewall of the European Central Bank (ECB) and the by the International Monetary Fund (IMF) and commitment to act collectively to backstop the union. momentum measures suggest that infl ationary Overall, however, risks of the sovereign debt crisis pressures have peaked. However, further moderation disrupting the global fi nancial system have ebbed. in domestic infl ation going into 2013-14 is likely to be Japan has re-entered recession. Among the emerging muted as the correction of under-pricing of and developing economies (EDEs), a pick-up in the administered items is still incomplete and food pace of growth in China is likely. A combination of a infl ation remains elevated. Accordingly, the setting of slump in external demand and domestic structural monetary policy has to remain sensitive to confl icting bottlenecks has slowed down growth in most other EDEs. Furthermore, infl ationary pressures persist in pressures and attendant risks. some of them. Overall, global economic prospects 4. This policy review is accordingly set in the have improved modestly since the SQR even as context of a slowly improving global environment and signifi cant risks remain. a tipping point in the balance of risks between growth 2. Domestically, growth remains sluggish, and infl ation on the domestic front. It should be read notwithstanding some tentative signs of the slowdown and understood together with the detailed review beginning to level off. Industrial activity weakened, in Macroeconomic and Monetary Developments refl ecting subdued manufacturing, deceleration in released yesterday by the Reserve Bank. electricity generation and contraction in mining 5. This Statement is organised in four sections: activity. While the series of policy measures announced Section I provides an overview of global and domestic by the Government has boosted market sentiment, macroeconomic developments; Section II sets out the the investment outlook is still lacklustre, especially in outlook and projections for growth, infl ation and terms of demand for new projects. Consumption monetary aggregates; Section III explains the stance of monetary policy; and Section IV specifi es the monetary * Announced by Dr. Duvvuri Subbarao, Governor, Reserve Bank of India on January 29, 2013 in Mumbai. measures. RBI Monthly Bulletin February 2013 1 MONETARY POLICY STATEMENT 2012-13 Third Quarter Review of Monetary Policy 2012-13 I. The State of the Economy 10. Headline wholesale price index (WPI) infl ation eased signifi cantly from 8.1 per cent in September Global Economy 2012 to 7.2 per cent by December. Notably, infl ation 6. Signs of stabilisation in global economic activity on account of non-food manufactured products, which have been in evidence in recent months, led by have a weight of 55 per cent in the WPI, fell sharply in stronger than expected growth in the US in Q3, November-December as input price pressures eased acceleration in the pace of activity in China and a pick- primarily on the back of ebbing metal, non-metallic up in industrial production in EDEs in Q4. Activity in minerals and chemicals group infl ation. The seasonally the euro area continues to be in a contraction mode, adjusted three-month moving average annualised though fi nancial market confi dence has improved. infl ation also suggests a moderation in headline as Japan has embarked on a fresh fi scal stimulus well as non-food manufactured products infl ation. following contraction in Q3. In the UK, a modest GDP With the industrial outlook survey also pointing to growth in Q3 was followed by a decline in Q4. The softening of the rate of increase of output prices, the HSBC Emerging Market Index rose in Q4. The global pricing power of corporates seems to have weakened. composite purchasing managers’ index (PMI) also rose Fuel group infl ation moderated in December, mainly marginally in December. refl ecting the tempering of infl ation of non- 7. According to the IMF, consumer price infl ation administered petroleum products as well as the range- has eased in both advanced economies (AEs) and bound exchange rate of the rupee. EDEs in 2012. However, risks to the infl ation outlook 11. Food infl ation, on the other hand, showed a from commodity price pressures persist. contrarian behaviour, moving into double digits in Domestic Economy December. Signifi cant price pressures emanated from cereals. Prices of pulses and other protein-based food 8. Year-on-year (y-o-y) real GDP growth slowed from items remained elevated. Furthermore, with the 5.5 per cent in Q1 of 2012-13 to 5.3 per cent in Q2. The fi rming up of prices of edible oils and grain mill decline in the GDP growth rate became broad based, products, the overall momentum in food infl ation with consumption demand also slowing alongside remained fi rm. stalling investment and declining exports. On the supply side, there are indications of weakening 12. Infl ation based on the new combined (rural and resilience of services to sluggish global growth. urban) consumer price index (CPI) (Base: 2010=100) rose to 10.6 per cent in December, largely refl ecting 9. Looking ahead, there are some tentative signs of the surge in food infl ation. Excluding food and fuel a reversal in momentum. While industrial production groups, CPI infl ation remained unchanged at 8.4 per slowed to a y-o-y increase of 1.0 per cent in April- cent during Q3. November 2012, the seasonally adjusted three-month moving average of the index of industrial production 13. According to the latest Reserve Bank’s urban (IIP) points to a pick-up. The manufacturing PMI rose households’ survey, infl ation expectations for Q4 in December on the back of higher order book volumes edged up marginally. Wage infl ation in rural areas and new export orders. The services purchasing remained high, notwithstanding some recent managers’ index (PMI) also rose in December on moderation; as these wage increases have not been expectations of a revival of demand. The Reserve accompanied by improvement in productivity, they Bank’s industrial outlook survey indicates positive have imparted infl ationary pressures. House price business sentiment in Q3 and Q4. Coverage under infl ation, as measured by the Reserve Bank’s quarterly rabi sowing has been broadly the same as in the house price index, also remains elevated on a y-o-y corresponding period of last year.