Global Developments

Global economic activity decelerated somewhat in relation to earlier expectations, mainly on account of the slowdown in the US economy.

According to the World Economic Outlook (WEO) of the International Monetary Fund (IMF), the forecast for global real GDP growth, on a purchasing power parity basis, is expected to slow from 4.9 per cent in 2007 to 3.7 per cent in 2008.

Continuing strong demand and dwindling stocks are reflected in a tight supply-demand food situation globally, leading to the emergence of food price inflation as a key risk to global stability.

The Food and Agricultural Organisation''s (FAO) global food price index, which rose by 40 per cent in 2007 to the highest level on record, has continued to increase in the first quarter of 2008 as well, as world food stocks have fallen to their lowest levels in 25 years.

In the global foodgrains market, prices of major crops such as corn, soyabeans and wheat have increased by 58.2 per cent, 86.3 per cent and 56.5 per cent, respectively, by April 25, 2008 from a year ago in response to surging demand.

According to the Energy Information Administration (EIA), tight fundamentals, reflected by low available crude oil surplus production capacity, combined with supply concerns in several oil exporting countries, have continued to put upward pressure on world crude oil prices.

In the EMEs, the recent jump in headline inflation caused by higher energy and food prices are of concern since this requires a balanced response in controlling inflation while being alert to decelerating impulses from the slowdown in the developed countries and the possibilities of prolonged global financial market turmoil.

Since the beginning of the turbulence in August 2007, central banks of advanced economies have responded with both conventional and unconventional measures to ease liquidity stress in financial markets and solvency issues among large financial institutions.

Some central banks such as the US Federal Reserve, the Bank of England, the Bank of Canada have cut policy rates since the third quarter of 2007 when the financial market turmoil surfaced.

Central banks of several countries, including the euro area, New Zealand, Japan, Korea, Malaysia, Thailand and Mexico have not changed their rates since the last quarter of 2007.

Some central banks that have tightened their policy rates in recent months include the Reserve Bank of Australia, the People''s Bank of China, the Banco Central de Chile and Banco Central do Brasil.

Large capital flows to EMEs have elicited monetary tightening responses from central banks either through hike in their policy rates or reserve requirements or both. Meanwhile, in several EMEs, central bank bonds have continued to absorb liquidity from the banking system.

Measures directly aimed at managing capital flows are also in evidence in many EMEs.

Overall Assessment

While aggregate supply capacities expanded and alleviated domestic macro-imbalances in 2007-08 to some extent, available indicators suggest that economic activity in India currently continues to be mainly demand-driven.

The pick-up in inflation during the fourth quarter of 2007-08 has mainly emanated from supply-side pressures such as the one-off increase in domestic petrol and diesel prices to partially offset the global crude oil price increase over the year; continuous hardening of prices of petroleum products that are not administered, rising prices of wheat and oilseeds and the adjustment in steel prices in March 2008 due to the surge in international prices.

The upsurge in inflation in India has occurred at a time when global commodity prices have been volatile at historically elevated levels and central banks in mature and emerging economies alike have been articulating heightened inflation concerns.

There are concerns that demand pressures, which have been reasonably contained so far, are being coupled with supply-side factors which, if not temporary, could impact domestic inflation significantly.

The moderation in non-food credit growth has been marked in respect of interest-sensitive sectors which had been recording significantly elevated growth rates in preceding years.