Elbow room

The Reserve Bank of India’s decision to keep repo rates on hold at 8 per cent mirrors the gloomy GDP prognostication in the mid-year economic analysis announced on Monday. A round of monetary easing may be likely in January, provided the economy gives indications of expanding by at least 6 per cent in the second half of fiscal 2013. However, restarting the rate reduction cycle is a challenge for RBI given the torpid demand conditions in the core infrastructure, capital goods, consumer durables and services sectors. The monetary policy review indicates that the economy should expand at 5.9-6.3 per cent in the second half of 2013 to achieve growth of at least 5.7 per cent this fiscal.

But RBI will prefer to dance to its own tune as it still sees upside risks to inflation. Headline inflation has been above the RBI’s traditional comfort zone thanks in part to the rise in administered fuel prices. However, it has been below the bank’s projected levels over the past two months, and hence, the possibility of a shift in monetary focus in January cannot be ruled out.

But would it make sense for the central bank to effect monetary easing solely in anticipation of inflation abating in the coming months? Verily, it must be said that finance minister Chidambaram is at his vocal best when pinning his hopes on a RBI repo cut, driven by emotions rather out of proportion with the more vital tasks of boosting GDP growth by managing persistent inflation concerns, reducing the trade deficit and reviving sectors like energy, agriculture, hospitality, transport, not to mention services and manufacturing.

The economic analysis notes that in the first eight months of fiscal 2013, trade deficit widened to $129.5 billion. Hopes of keeping current account deficit (CAD) lower than last year’s 4.2 per cent of GDP, will pose a challenge following import dependency rising in the first half of the fiscal. $19 billion was added to the CAD register in November alone with exports falling 4 per cent, and such a trend could make the $360-billion export target difficult to achieve. RBI’s move to stimulate capital flow in sectors like real estate and housing finance by allowing them to raise upto $1 billion via external commercial borrowings is a welcome move. While a CRR rate cut would be welcomed across sectors, the fact remains that the government’s comfort zone for inflation and GDP growth outlined in the mid-year economic analysis is at the moment purely aspirational.

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