RBI rings alarm bells, says India's economic growth may fall under 5.8%, caps rate cut talk

Jan 28 2013, 19:34 IST
Comments 0
RBI rings alarm bells, says India's economic growth may fall under 5.8%	RBI rings alarm bells, says India's economic growth may fall under 5.8%
SummaryRBI says its hands are tied as far as easing monetary policy is concerned.

Citing high inflation and widening Current Account Deficit (CAD) as big constraints, Reserve Bank of India (RBI) today said there is limited scope for monetary actions like interest rate cut to boost growth in the third quarter policy to be announced on Tuesday.

"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", RBI said in its report on Macroeconomic and Monetary Developments issued on the eve of policy.

The central bank, however, said that with the government executing economic reforms measures, it would be possible for the monetary policy to increasingly focus on revival of growth.

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

As regards inflation, RBI said it was likely to moderate below its projection of 7.5 per cent 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 per cent in December, was much above the central bank's comfort level.

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

The economic growth in 2012-13 was likely to fall below its projection of 5.8 per cent, 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 per cent 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 per cent 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 per cent 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.

RBI on reforms: Restore investor confidence, usher in transformation

The Reserve Bank of India today said recent reforms have reduced the immediate risks for the economy but emphasised on the need for more measures to restore investor confidence.

Flagging concerns about fiscal and external imbalances in the economy, the apex bank said that more reforms are required, especially in road and power sectors, to remove the investment bottlenecks.

"The fresh round of reforms that were initiated in September 2012, after a hiatus, has reduced the immediate risks facing the Indian economy...

"On the whole it appears that the reform measures taken so far have not decisively lifted business sentiments and further action may be needed to restore confidence," RBI said in its third quarter review of Macroeconomic and Monetary Development.

The monetary policy, RBI said, could focus more on boosting growth after the reform actions get executed.

"While government has embarked on a fiscal adjustment path, staying on this course over the medium-term is necessary for providing sufficient space for monetary policy to stimulate growth," RBI said.

In the past couple of months the government has taken a host of reforms initiative including opening the multi-brand retail chain to FDI, and also the Union Cabinet has approved hiking foreign investment limits in the insurance and pension sectors.

Earlier this month, the government also allowed partial deregulation of diesel prices, besides limiting the number of subsidised LPG cylinders to nine per family a year.

"Fiscal risks have somewhat moderated in 2012-13, but a sustained commitment to fiscal consolidation is needed to generate monetary space," RBI said.

The RBI has held interest rates steady for the last nine months since April policy review as it wanted the government to execute fiscal measures to improve investment climate.

"...There is a long road ahead to bring about a sustainable turnaround for the Indian economy," RBI said, adding that the economy could start turning around in 2013-14 as the impediments to investments are removed.

"However, weak global economic conditions, domestic business constraints and low confidence levels may keep the recovery modest next year, while the near-term risks to the economy emanating from fiscal and external imbalances remain," it said.

The RBI further said that the economic growth in the current fiscal is likely to fall below the earlier estimate of 5.8 per cent.

The RBI-sponsored survey lowers economic growth projection to 5.5 per cent for 2012-13, and 6.5 per cent for next fiscal.

Economic growth could slip to 5.5 pc this fiscal: RBI survey

India's economic growth could fall to 5.5 per cent this fiscal before seeing gradual recovery next year, a RBI-sponsored survey said today.

The latest estimate, coming a day ahead of the RBI quarterly monetary policy review, is lower than the government's revised annual growth estimate of 5.7 per cent.

The median growth projection has been revised downwards to 5.5 per cent on the back of slower growth for 2012-13 fiscal, said the 22nd round of survey by professional forecasters of RBI.

While the government expects the economy to grow by 5.7 per cent in the current fiscal, the RBI had earlier projected a growth rate of 5.8 per cent.

The RBI sponsored survey said that there would be a gradual recovery in 2013-14 and the economy could clock a growth of 6.5 per cent.

The Indian economy grew at over over 8 per cent for two consecutive years before declining to 6.5 per cent in 2011-12 fiscal.

"Growth in 2012-13 is likely to fall below the reserve Bank's baseline projection of 5.8 per cent," the RBI said in its third quarter review of Macroeconomic and Monetary Developments.

It said due to supply and infrastructure bottlenecks and slack in external demand, the industrial output is contracting. This has also impacted the economic growth in the first half of the current fiscal which stood at 5.4 per cent.

"Even though a modest recovery may set in from Q4 of 2012-13 as reforms and efforts to remove structural constraints get underway, sustaining this recovery through 2013-14 would require all-round efforts in removing impediments for business activity.

"With global recovery likely to stay muted in the near term, closing the output gap in India would be challenging," the RBI said.

To boost growth, the government has taken a host of fiscal measures including liberalisation of FDI in multibrand retail, amendment of Banking Regulations Act and setting up of Cabinet Committee on Investment to accord fast track clearances to large value projects.

"It is imperative that reform measures continue to be executed efficiently and domestic inflation recedes further to support sustainable recovery in India," RBI said.


* Economic growth in the current fiscal likely to fall below estimate of 5.8 per cent: RBI.

* RBI projects March-end inflation to fall below 7.5 per cent, but warns of upside risks.

* Average WPI inflation to moderate to 7 per cent in 2013-14 from 7.5 per cent in current year: RBI.

* Widening Current Account Deficit (CAD) major constraint in easing monetary policy: RBI

* RBI-sponsored survey projects sticky inflation and slow recovery in 2013-14.

* RBI-sponsored survey lowers economic growth projection to 5.5 per cent for 2012-13, and 6.5 per cent for next fiscal.

Ads by Google
Reader´s Comments
| Post a Comment
Please Wait while comments are loading...