RBI's tightening measures can pull GDP to sub 5 pct level: Experts

Aug 09 2013, 19:47 IST
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SummaryThe recent liquidity tightening moves by the Reserve Bank may have an adverse impact on GDP growth.

The recent monetary tightening measures by the Central Bank is increasing the downside risk to the country's growth outlook, which could fall to sub 5 per cent in the current financial year if these measures are prolonged, experts say. According to foreign brokerage Bank of America - Merrill Lynch (BofA-ML) prolonging the recent liquidity tightening moves by the Reserve Bank may have an adverse impact on GDP growth which could slip to a low of 4.8 percent.

Meanwhile, Morgan Stanley in a research note, said that the recent monetary tightening and uncertain global capital market environment could mean growth stays low for at least two more quarters and increases the risk of GDP growth sliding to 3.5-4 per cent.

India's growth fell to a decade's low of 5 per cent in fiscal 2012-13.India's GDP growth was below 5 per cent during the quarters ending December-2012 and March-2013 and is unlikely to have increased during the quarter ending June 2013, Morgan Stanley said in a research note.

"A weak growth trend lasting for 4-5 quarters would increase the risk of a vicious cycle building, whereby the economy becomes vulnerable and the risk increases of GDP growth sliding to 3.5-4 per cent," Morgan Stanley Managing Director and the Asia Pacific Economist Chetan Ahya said.

According to DSP Merrill Lynch Chief Economist Indranil Sen Gupta, "incoming data should reinforce our view that FY14 growth will slip to 4.8 per cent if RBI tightening is not rolled back before the October-March busy season." In two sets of announcements last month, the RBI had taken a string of liquidity tightening measures aimed at curbing speculation on the depreciating rupee, which has lost nearly 12 per cent against the dollar since the start of FY14.

The unconventional steps included limiting banks' overnight borrowing to 0.5 percent of their net demand and time liabilities, more sale of government bonds and raising the interest rate on the marginal standing facility for banks.

Morgan Stanley further noted that, if the rupee continues with the downtrend, the government is likely to augment capital inflows in some form of dollar debt.

However, such a move would only help cushion the pace of weakening in the currency, and not make a major difference in the trend unless the global environment changes, it said."A sustainable solution would be to accelerate implementation of structural reforms that in turn help correct the imbalances in the economy and put it back on

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