MACROECONOMIC REVIEW

Global Economy

Recovery is on track in 2014, though tightening nancial conditions and the divergence in
ination pose risks.

On the current reckoning, global growth is likely to be in the vicinity of 3 per cent in 2014, about
a percentage point higher than in 2013. The expansion in global output is expected to be led by
advanced economies (AEs), especially the US. However, downside risks to growth trajectory arise
from ongoing tapering of quantitative easing (QE) in the US, continuing deation concerns and weak
balance sheets in the euro area and, inflationary pressures in the emerging market and developing
economies (EMDEs).
Weakening growth and nancial fragilities in China that have arisen from rapid credit in recent years
pose a large risk to global trade and growth.
Improved EMDE growth emanated largely from external demand on the back of currency
depreciation in these countries.
Global ination remains benign with activity levels staying below potential in the AEs as well as in
some large EMDEs and a softer bias for global commodity prices continuing into 2014. With
corporate leverage rising in many EMDEs, capital ow volatility could translate into liquidity shocks
impacting asset prices.

The Indian Economy
The Indian economy is set on a disinationary path, but more efforts may be needed to
secure recovery.
While the global environment remains challenging, policy action in India has rebuilt buffers to
cushion it against possible spillovers. These buffers effectively bulwarked the Indian economy against
the two recent occasions of spillovers to EMDEs the rst, when the US Fed started the withdrawal
of its large scale asset purchase programme and the second, which followed escalation of the Ukraine
crisis. On both these occasions, Indian markets were less volatile than most of its emerging market
peers.
With the narrowing of the twin decits both current account and fiscal as well as the replenishment
of foreign exchange reserves, adjustment of the rupee exchange rate, and more importantly, setting in
motion disinationary impulses, the risks of near-term macro instability have diminished. The
disinationary process is already underway with the headline ination trending down in line with the
glide path, though inflation stays well above comfort levels. Growth concerns remain signicant with
GDP growth staying sub-5 per cent for seven successive quarters and index of industrial production
(IIP) growth stagnating for two successive years. Though a negative output gap has prevailed for long,
there is clear evidence that potential growth has fallen considerably with high ination and low
growth.





OUTPUT AND DEMAND

Growth stays low, structural constraints affect potential output.
Growth in the Indian economy had been shifting down from 9.6 per cent in Q4 of 201011.It troughed
around 4.4 per cent for three quarters from Q3 of 2012-13 to Q1 of 2013-14. Since then there are
signs of growth bottoming out with marginal improvement recorded during Q2 and Q3 of 2013-14 to
4.8 and 4.7 per cent respectively.
Decline in nancial savings, sluggish growth in fixed capital formation over successive quarters,
persistently high ination and low business condence contributed to the decline in potential growth.
The economy seems to be running a negative output gap of about one percentage point
Agriculture sector witnessed record production
The satisfactory monsoon and the absence of extreme climatic events until lately augur well for
agricultural production and rural demand. As per the second advance estimates, the production of rice,
wheat, pulses, oilseeds and cotton during 2013-14 have been estimated to be the highest ever.
The possible effects of El Nino on the monsoon also add an additional element of uncertainty for
future harvests. In this backdrop, the ability to meet increased food demand in the context of the
implementation of the National Food Security Act, in the face of tightening farm labour markets and
rising input costs remains a challenge.
I ndustrial growth stagnating
The Index of Industrial Production (IIP) showed no increase during April-January 2013-14, compared
with 1.0 per cent growth in the corresponding period of the previous year.This stagnation in growth
over two years reects subdued investment and consumption demand. This has resulted in contraction
in production of capital goods and consumer durables in the current year.
Growth of core industries, which provide key inputs to the industrial sector, remained sluggish at 2.4
per cent during April-January 2013-14 compared to a growth of 6.9 per in the corresponding period a
year ago.
Lead indicators of services sector indicate an uptick
The developments in lead indicators of the services sector activity signal improvement in most
segments except cement production and in commercial vehicle sales.
Employment scenario showing signs of gradual recuperation
Aggregate sales growth (y-o-y) of large companies decelerated in Q3
Corporate investment intentions improved in Q3

INFLATION

Food price corrections moderate inationary pressures.

CPI ination declined to 8.1 per cent in February 2014 (a 25-month low) from 11.2 per cent in
November 2013, mainly due to declining vegetable prices during this three-month period.



CPI ination, excluding food and fuel, remained high and persistent at 8.0 per cent in
February 2014 as compared with 8.1 per cent in January 2014.The persistence was on account of
pressures from housing, transport and communication and services led components such as medical
care, education and stationery, household requisites and others.

WPI inflation moderates signicantly, but fuel ination remains high

CAD improves, driven mainly by declining imports

The narrowing of the CAD in 2013-14 followed a lower trade decit due to higher exports as well as
moderation in imports.
With a lower CAD and build-up of foreign exchange reserves, the downward pressure on the currency
and the volatility in the Indian rupee began to subside. The rupee has also moved in a narrow range of
Rs.60.10 to Rs.62.99 per US dollar since end-November 2013 (up to March 28, 2014).



MONETARY AND FINANCIAL CONDITIONS

A 25 bps hike in policy rate undertaken in January to secure economy on disinationary
path

The Reserve Bank in its Third Quarter 2014, hiked the repo rate by 25 bps to 8 per cent on account of
upside risks to ination, to anchor ination expectation and to contain second round effects.




TOP 12 COUNTRIES AS PER GDP:


GDP
Billion
USD
GDP
YoY
GDP
QoQ
Interest
rate
Inflation
rate
Jobless
rate
Gov.
Budget
Debt/GDP
Current
Account
Exchange
rate
Population
United
States
15685 2.60% 2.60% 0.25% 1.50% 6.70% -4.10% 101.53% -2.30 119.89 317.30
Euro Area 12195 0.50% 0.20% 0.25% 0.50% 11.90% -3.00% 92.60% 1.50 1.35 332.88
China 8230 7.40% 1.40% 6.00% 2.40% 4.10% -2.10% 26.00% 2.00 6.06 1354.04
Japan 5960 2.60% 0.20% 0.00% 1.50% 3.60% -7.60% 227.20% 0.70 102.10 127.22
Germany 3400 1.30% 0.40% 0.25% 1.04% 5.10% 0.00% 78.40% 7.30 1.35 81.84
France 2613 0.80% 0.30% 0.25% 0.60% 10.20% -4.30% 93.50% -1.90 1.35 65.28
United
Kingdom
2440 2.70% 0.70% 0.50% 1.60% 6.90% -5.80% 90.60% -4.40 1.64 63.26
Brazil 2435 1.90% 0.70% 11.00% 6.15% 5.00% 1.90% 65.10% -3.66 2.41 193.94
Russia 2015 0.80% -0.50% 7.00% 6.90% 5.40% -0.50% 8.40% 4.80 35.23 143.35
Italy 2013 -0.90% 0.10% 0.25% 0.37% 13.00% -3.00% 132.60% -0.70 1.35 59.39
India 1842 4.70% 1.00% 8.00% 8.31% 3.80% -4.90% 67.57% -4.60 62.72 1233.00

Unemployment Rate

The unemployment rate can be defined as the number of people actively looking for a job
divided by the labour force. Changes in unemployment depend mostly on inflows made up of
non-employed people starting to look for jobs, of employed people who lose their jobs and
look for new ones and of people who stop looking for employment.


India Unemployment Rate
Unemployment Rate in India decreased to 3.80 percent in 2011 from 9.40 percent in 2010. Unemployment Rate
in India is reported by the India Ministry of Labour. From 1983 until 2011, India Unemployment Rate averaged
7.6 Percent reaching an all time high of 9.4 Percent in December of 2010 and a record low of 3.8 Percent in
December of 2011. In India, the unemployment rate measures the number of people actively looking for a job as
a percentage of the labour force.

Actu
al
Previous Highest Lowest Forecast Dates Unit
Frequenc
y
3.80 9.40 9.40 3.80 0.10 | 2014/06 1983 - 2011 Percent Yearly




Interest Rate

The interest rate shown refers to the central bank benchmark interest rate. Usually, the central
bank benchmark interest rate is the overnight rate at which central banks make loans to the
commercial banks under their jurisdiction. Moving the benchmark interest rate, the central
bank is able to make an impact on interest rates of commercial banks, inflation level of the
country and national currency exchange rate. Reduction of interest rates should bring increase
in business activity, a rise in inflation rate and weakening of national currency. In case of
increase in interest rates the level of business activity is likely to drop, inflation declines and
national currency strengthens.

India Interest Rate
The benchmark interest rate in India was last recorded at 8 percent. Interest Rate in India is
reported by the Reserve Bank of India. Interest Rate in India averaged 6.62 Percent from
2000 until 2014, reaching an all time high of 14.50 Percent in August of 2000 and a record
low of 4.25 Percent in April of 2009. In India, interest rate decisions are taken by the
Reserve Bank of India's Central Board of Directors. The official interest rate is the
benchmark repurchase rate.

Actual Previous Highest Lowest Forecast Dates Unit Frequency

8.00 8.00 14.50 4.25 7.75 | 2014/06 2000 - 2014 Percent Monthly


Industrial Production

Industrial Production Index is an economic indicator that measures changes in output for the
manufacturing, mining, and utilities. Although these sectors contribute only a small portion
of GDP, they are highly sensitive to interest rates and consumer demand. This makes
Industrial Production an important tool for forecasting future GDP and economic
performance. Industrial Production figures are also used by central banks to measure
inflation, as high levels of industrial production can lead to uncontrolled levels of
consumption and rapid inflation.

India Industrial Production
Industrial Production in India decreased 1.90 percent in February of 2014 over the same
month in the previous year. Industrial Production in India is reported by the Ministry of
Statistics and Programme Implementation (MOSPI). Industrial Production in India averaged
6.76 Percent from 1994 until 2014, reaching an all time high of 20 Percent in November of
2006 and a record low of -7.20 Percent in February of 2009. In India, industrial production
measures the output of businesses integrated in industrial sector of the economy such as
manufacturing, mining, and utilities.

Actual Previous Highest Lowest Forecast Dates Unit Frequency

-1.90 0.80 20.00 -7.20 1.63 | 2014/06 1994 - 2014 Percent Monthly






GDP Annual Growth Rate

The annual growth rate in Gross Domestic Product measures the increase in value of the
goods and services produced by an economy over the period of a year. Therefore, unlike the
commonly used quarterly GDP growth rate the annual GDP growth rate takes into account a
full year of economic activity, thus avoiding the need to make any type of seasonal
adjustment.


India GDP Annual Growth Rate
The Gross Domestic Product (GDP) in India expanded 4.70 percent in the fourth quarter of
2013 over the same quarter of the previous year. GDP Annual Growth Rate in India is
reported by the Ministry of Statistics and Programme Implementation (MOSPI). GDP Annual
Growth Rate in India averaged 5.84 Percent from 1951 until 2013, reaching an all time high
of 11.40 Percent in the first quarter of 2010 and a record low of -5.20 Percent in the fourth
quarter of 1979. In India, the annual growth rate in GDP at factor cost measures the change
in the value of the goods and services produced in India, without counting governments
involvement. Simply, the GDP value excludes indirect taxes (VAT) paid to the government
and includes the original value of products without accounting for government subsidies.

Indian GDP Grows Below Expectations

In the fourth quarter of 2013, Indian economic growth slowed to 4.7 percent over a year
earlier, down from a 4.8 percent expansion in the previous period, hurt by a contraction in
manufacturing and mining output.
On an annual basis, finance, insurance, real estate and business activities recorded the highest
growth rate (12.5 percent), accelerating from a 10 percent expansion in the previous quarter.
Community, social and personal services advanced at a faster pace of 7 percent (4.2 percent
in the September quarter) and trade, hotels, transport and communication activities rose 4.3
percent on the year.

Construction output slowed sharply to an annual growth rate of 0.6 percent (4.3 percent in the
preceding three month period); electricity, water and gas supply rose 5 percent and
agricultural production advanced at a slower pace of 3.6 percent.

In contrast, mining and manufacturing production shrank on the year. Mining contracted 1.6
percent while manufacturing dropped 1.9 percent, following a 1 percent expansion in the
previous quarter.


Wholesale Price Index
WPI is the index that is used to measure the change in the average price level of goods traded in
wholesale market. In India, a total of 435 commodities data on price level is tracked through WPI
which is an indicator of movement in prices of commodities in all trade and transactions. It is also
the price index which is available on a weekly basis with the shortest possible time lag only two
weeks. The Indian government has taken WPI as an indicator of the rate of inflation in the economy.
India Wholesale Price Index Change
Producer Prices in India increased 5.70 percent in March of 2014 over the same month in the
previous year. Producer Prices Change in India is reported by the Office of the Economic Advisor,
India. Producer Prices Change in India averaged 7.70 Percent from 1969 until 2014, reaching an all
time high of 34.68 Percent in September of 1974 and a record low of -11.31 Percent in May of 1976.
In India, the wholesale price index (WPI) is the main measure of inflation. The WPI measures the
price of a representative basket of wholesale goods. In India, wholesale price index is divided into
three groups: Primary Articles (20.1 percent of total weight), Fuel and Power (14.9 percent) and
Manufactured Products (65 percent). Food Articles from the Primary Articles Group account for 14.3
percent of the total weight. The most important components of the Manufactured Products Group
are Chemicals and Chemical products (12 percent of the total weight); Basic Metals, Alloys and Metal
Products (10.8 percent); Machinery and Machine Tools (8.9 percent); Textiles (7.3 percent) and
Transport, Equipment and Parts (5.2 percent).

Actual Previous Highest Lowest Forecast Dates Unit Frequency

5.70 4.68 34.68 -11.31 5.62 | 2014/06 1969 - 2014 Percent Monthly


In March of 2014, India wholesale prices accelerated to an annual 5.7 percent on higher
food, fuel and manufacturing cost, breaking a three-month easing trend.
Year-on-year, food prices accelerated to 9.9 percent from 8.12 percent recorded in February.
Cost of potato surged 27.83 percent, fruit prices rose 16.15 percent and rice cost increased
12.56 percent. Price of vegetables rose 8.57 percent.

Cost of non-food articles slowed to an annual 4.62 percent (5.13 percent in February); prices
of manufactured goods accelerated to 3.23 percent from 2.76 percent in the previous month
and cost of fuel and power rose at a faster 11.22 percent, boosted by a 9.28 percent increase
in liquefied petroleum gas and a 14.63 percent rise in prices of high speed diesel.

From February to March, wholesale prices accelerated to 0.5 percent. The heavily weighted
manufactured products sub index rose 0.52 percent and prices of food articles increased 1
percent.






Current Account

Current Account is the sum of the balance of trade (exports minus imports of goods and
services), net factor income (such as interest and dividends) and net transfer payments (such
as foreign aid). The balance of trade is typically the most important part of the current
account. And a current account surplus is usually associated with trade surplus. However, for
the few countries with substantial overseas assets or liabilities, net factor payments may be
significant. Positive net sales to abroad generally contribute to a current account surplus as
the value interest or dividends generated abroad is bigger than the value of interest or
dividends generated from foreign capital in the country. Net transfer payments are very
important part of the current account in poor and developing countries as workers'
remittances, donations, aids and grants and official assistance may balance high trade deficits.


India Current Account
India recorded a Current Account deficit of 4.20 USD Billion in the fourth quarter of 2013.
Current Account in India is reported by the Reserve Bank of India. Current Account in India
averaged -1.63 USD Billion from 1949 until 2013, reaching an all time high of 7.36 USD
Billion in the first quarter of 2004 and a record low of -31.86 USD Billion in the fourth
quarter of 2012. Current Account is the sum of the balance of trade (exports minus imports
of goods and services), net factor income (such as interest and dividends) and net transfer
payments (such as foreign aid).
Actual Previous Highest Lowest Forecast Dates Unit Frequency

-4.20 -5.15 7.36 -31.86 7.82 | 2014/06 1949 - 2013 USD Billion Quarterly




Balance of Trade

The balance of trade is the difference between the monetary value of exports and imports in
an economy over a certain period of time. A positive balance of trade is known as a trade
surplus and occurs when value of exports is higher than that of imports; a negative balance of
trade is known as a trade deficit or a trade gap.


India Balance of Trade
India recorded a trade deficit of 10507.30 USD Million in March of 2014. Balance of
Trade in India is reported by the Ministry of Commerce and Industry, India. Balance of
Trade in India averaged -1824.10 USD Million from 1957 until 2014, reaching an all
time high of 258.90 USD Million in March of 1977 and a record low of -20210.90 USD
Million in October of 2012. India had been recording sustained trade deficits due to
low exports base and high imports of coal and oil for its energy needs. India is leading
exporter of petroleum products, gems and jewelry, textiles, engineering goods,
chemicals and services. Main trading partners are European Union countries, United
States, China and UAE.
Actual Previous Highest Lowest Forecast Dates Unit
Frequenc
y
-
10507.3
0
-8130.20 258.90 -20210.90 -8380.76 | 2014/04 1957 - 2014 USD Million Monthly




MONETARY POLICY
A Tool used to influence Interest rates, Inflation and credit availability through changes in supply of
money available in the economy.
Different rates in monetary policy used by RBI :-
Repo Rate:
Repo rate is the rate at which banks borrow funds from the RBI to meet the gap between the
demand they are facing for money (loans) and how much they have on hand to lend. The
policy repo rate has been reduced under the liquidity adjustment facility (LAF) by 25 basis
points from 7.5 per cent to 7.25 per cent
Reverse Repo Rate:
The rate at which RBI borrows money from the banks (or banks lend money to the RBI) is
termed the reverse repo rate. The RBI uses this tool when it feels there is too much money
floating in the banking system. The reverse repo rate under the LAF, determined with a
spread of 100 basis points below the repo rate, stands adjusted to 6.25 per cent
Marginal Standing Facility Rate:
MSF is a new scheme announced by the Reserve Bank of India (RBI) in its Monetary Policy
(2011-12) and refers to the penal rate at which banks can borrow money from the central
bank over and above what is available to them through the LAF window. MSF, being a penal
rate, is always fixed above the repo rate. The MSF would be the last resort for banks once
they exhaust all borrowing options including the liquidity adjustment facility by pledging
through government securities, which has lower rate of interest in comparison with the MSF.
The Marginal Standing Facility (MSF) rate, determined with a spread of 100 basis points
above the repo rate, stands adjusted to 8.25 per cent .
Bank Rate:
Rate at which Central Bank lends money to commercial Banks
The bank rate signals the central bank's long-term outlook on interest rates. If the bank rate
moves up, long-term interest rates also tend to move up, and vice-versa.
Any increase in Bank rate results in an increase in interest rate charged by Commercial
banks which in turn leads to low level of investment and low inflation
The Bank Rate stands adjusted to 8.25 per cent
Cash Reserve Ratio:
It refers to the cash which banks have to maintain with RBI as certain percentage of their
demand and time liabilities
An increase in CRR reduces the cash with commercial banks which results in low supply of
currency in the market, higher interest rate and low inflation
The cash reserve ratio (CRR) of scheduled banks has been retained at 4.0 per cent of their
net demand and time liabilities (NDTL).
LAF:
Liquidity adjustment facility is a monetary policy tool which allows banks to borrow money
through repurchase agreements. LAF is used to aid banks in adjusting the day to day
mismatches in liquidity. LAF consists of repo and reverse repo operations. Repo or
repurchase option is a collaterised lending i.e. banks borrow money from Reserve bank of
India to meet short term needs by selling securities to RBI with an agreement to repurchase
the same at predetermined rate and date. The rate charged by RBI for this transaction is called
the repo rate. Repo operations therefore inject liquidity into the system. Reverse repo
operation is when RBI borrows money from banks by lending securities. The interest rate
paid by RBI is in this case is called the reverse repo rate. Reverse repo operation therefore
absorbs the liquidity in the system.
TRANSMISSION MECHANISM
The way in which changes in the repo rate affect inflation and the rest of the economy is
known as the transmission mechanism. The transmission mechanism is actually not one but
several different mechanisms that interact. Some of these have a more or less direct impact on
inflation while others take longer to have an effect. It is generally held that a change in the
repo rate has its greatest impact on inflation after one to two years.

Interest Rate Channel:-
When Repo Rate increases.
Banks borrow from RBI at a higher rates of interest
They lend it to the borrowers at a high rate of interest
As lending interest rate increases, borrowing of money decreases.
Banks become unable to borrow at repo rate
Increase in the deposit interest rate to attract depositors.
Exchange Rate Channel:-
When Repo Rate increases.
Interest Rate Increases
Makes Indian assets more attractive than investments denominated in other currencies
Results in a capital inflow and increased demand for Rupees which strengthens the
Exchange Rate.
Fall in exports & increase in imports
Lower Import Prices & Reduction in demand
Lower Inflation.


On the basis of an assessment of the current and evolving macroeconomic situation,
the RBI has decided to:
increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis
points from 7.75 per cent to 8.0 per cent;
and keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent
of net demand and time liability (NDTL).
Consequently, the reverse repo rate under the LAF stands adjusted at 7.0 per cent,
and the marginal standing facility (MSF) rate and the Bank Rate at 9.0 per cent.