Mumbai: With ample liquidity in the system, India is set to grow at a rate of 6.5%, the RBI said on Monday. It also indicated that the key rates may remain unchanged in its monetary policy review.
The RBI on Monday said it has ensured ample liquidity in the system through a series of rate cuts in the last 10 months, hinting that it may keep policy rates unchanged in its quarterly credit policy review on Tuesday.
The Reserve Bank of India (RBI) said the revision was on account of positive outlook emanating from several sources, including the performance of core infrastructure industries, overall manufacturing output and roboust showing by the services sector.
"Since mid-September 2008, the policy repo (overnight lending) rate has been reduced by 425 basis points, the reverse repo (borrowing) has been brought down by 275 basis points" resulting in liquidity injection of over Rs 5,61,700 crore, RBI said in its macro-economic report released a day ahead of its first quarterly credit policy review.
"These measures taken by the Reserve Bank have ensured availability of ample liquidity in the banking system... evident in the large and regular absorption of the surplus from the system through liquidity absorption facility."
It said its focus has been on providing ample rupee liquidity, ensuring comfortable US dollar liquidity and keeping the market environment conducive for credit flow to productive sectors.
RBI noted that core infrastructure sector growth accelerated to 4.8 percent in the first quarter against 3.5 percent a year ago, led by growth in electricity, cement and coal, while industrial output rebounded sharply.
Services sector too showed positive signs, with a surge in lead indicators such as railway freight and new mobile connections, besides improvement in tourist arrivals.
However, commercial vehicle production and port cargo movement decelerated in the first two months of this fiscal.
Overall, the corporate performance subdued and there was a substantial deceleration in sales growth in the second half of 2008-09. "Corporate profitability also exhibited negative growth in the last three successive quarters of the year."
However, the RBI also said a complete economic turnaround may still be distant and the positive signs seen were just early indicators given the delayed monsoons and persistence of the global economic recession.
"Lagged impact of the negative growth in manufacturing in the last quarter of 2008-09 on services demand, negative growth in capital goods, decline in the production of commercial vehicles, and an accelerated fall in import growth suggesting dampened demand conditions," the RBI report added.
On government pegging fiscal deficit at 6.8 percent in FY`10 to boost demand and support a faster recovery, RBI said: "Notwithstanding the necessity of an expansionary fiscal response to the growth slowdown, there is a need to address the challenges for fiscal consolidation with a view to returning to the high growth path at the earliest."
The RBI Professional Forecasters Survey pegged economic growth in FY`10 at 6.5 percent.
RBI said that the growth outlook for 2009-10 needed to be assessed in the context of lead indicators so far, which it named as improved core sector performance, industrial output, demand revival for non-food credit and corporate showing.
However, it warned that there were other factors that could dampen growth outlook such as delayed progress of monsoon, decline in exports and lagged impact of poor manufacturing output of last fiscal.
Inflation could also move into higher territory, the central bank said.
"There are indications of inflation firming up by the end of the year due to the waning base effect of last year, increase in commodity prices, delayed progress of monsoon potentially driving up food prices," it said.