RBI cites difficulties in interest rate cut
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RBI cites difficulties in interest rate cut

Last Updated: Tuesday, January 29, 2013, 00:17
 
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RBI cites difficulties in interest rate cut
Mumbai: RBI Monday spoke of difficulties in effecting an interest rate cut as it kept its option open in its quarterly monetary policy tomorrow citing high inflation and widening current account deficit as big constraints inhibiting it.

"Given the preponderance of non-monetary factors behind the current slowdown in an environment where risks from high inflation, current account and fiscal deficits still remain, the scope for supportive monetary policy action is constrained", the RBI said in its report on Macroeconomic and Monetary Developments issued on the eve of policy.

The central bank, however, appeared to keep its options open when it said that when the government's recent economic reforms measures "show up fully and definitely" it would be possibl for the monetary policy to increasingly focus on revival of growth.

The RBI's pre-policy review statements comes in the midst of long standing expectations from the government and the industry of an interest rate cut to boost sagging growth.

Meanwhile, the professional forecasters sponsored by the RBI has lowered the growth projection for the current fiscal to 5.5 percent from 5.6 percent projected earlier. They have also cut the growth forecast for the next financial year to 6.5 percent from 6.6 percent.

As regards inflation, RBI said it was likely to moderate below its projection of 7.5 percent by March-end. However, it added, "suppressed inflation continues to pose a significant risk to the inflation in 2013-14. As some of the risks materialises, inflation path may turn stick."

Referring to recent reforms initiatives, it said, "(they) have reduced immediate risks, but there is a long road ahead to bring about a sustainable turnaround for the Indian economy. Business sentiments remain weak despite reform initiatives and consumer confidence is edging down."

On an overall assessment of macro-economic situation, the RBI said, monetary policy would undertake only calibrated action in view of inflation, which at over 7.18 percent in December, was much above the central bank's comfort level.

Average WPI inflation, it said, was expected to moderate from 7.5 percent in 2012-13 to 7.0 percent in 2013-14.

The economic growth in 2012-13 was likely to fall below its projection of 5.8 percent, RBI said, adding "output gap may start closing in 2013-14 although at a slow pace on the back of some revival in investment and consumption demand."

The revival of growth, which has remained below potential for the fifth successive quarter might take some more time as "policy initiatives of the government are yet to show up fully or definitively in data." the RBI said.

Moreover, it said, the weak industrial performance was likely to persist on account of factors like subdued external demand and lack of reliable power supply amidst coal shortages.

"Investment intentions in new projects improved marginally in Q2 of 2012-13, but investment is held back by project delays. Coal supply issues facing power sectors are yet to be fully resolved. Road investments have stalled due to issues relating to environmental clearances, land acquisition and financial closures", RBI said.

Observing that improvement in investment climate is a prerequisite for economic recovery, the RBI said, "demand conditions remained tepid, with private consumption continuing to decelerate and with investment yet to recover".

It further said that the trend of sluggish sales by India Inc was likely to continue in the third quarter of the current fiscal.

RBI said that quality of fiscal adjustment remains a concern, even as fiscal risks have reduced in 2012-13.

Government is working towards achieving revised fiscal deficit target of 5.3 percent of GDP by restricting both plan and non-plan expenditure during the last quarter of the year, even as significant shortfall in tax revenue is likely.

"Increased public investment to crowd in private investment along with removal of structural impediments that is slowing private investment is needed to pull the economy out of the current slowdown," the RBI added.

Since the start of 2012, the RBI said, it has worked towards easing monetary and liquidity conditions in a calibrated manner without jeopardising moderating inflation.

On CAD, it said the widening deficit (CAD) has emerged as a major constraint in easing monetary policy.

"With the likelihood that CAD/GDP ratio may exceed 4 percent of GDP for the second successive year in 2012-13, prudence is necessary while stimulating aggregate demand," it said.

The CAD/GDP ratio reached its highest ever peak of 5.4 percent of GDP in Q2 of 2012-13. Early indications are that it may increase further in Q3 of 2012-13. CAD has widened mainly due to worsening trade deficit.

It further said strong capital flows have facilitated financing of CAD, resulting only in marginal draw down of reserves.

While increased FII debt investment limits may enhance inflows, they do not provide a solution to CAD financing on a sustainable basis, the RBI added.

The central bank also said that improved global liquidity and recent policy reforms have aided FII inflows, leading to a turnaround in equity markets and revival of the Initial Public Offering (IPO) market.

Referring to agricultural sector, the RBI said Rabi crop is expected to be normal despite deficient rains, but is unlikely to fully compensate for kharif deficiency.

Sowing under rabi crop has been broadly the same as the level in the previous year.

PTI


First Published: Monday, January 28, 2013, 23:33


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