RBI cautious on monetary easing

RBI cautious on monetary easing

Even as popular perceptions are gaining currency over the beginning of a low-interest regime with a possible rate cut of at least 25 basis points (bps) by the central bank on Tuesday, the Reserve Bank of India (RBI) appears to tread cautiously stating that a sustained commitment to contain fiscal and current account deficits was imperative to create  room for monetary easing.

In its quarterly report on macroeconomic and monetary developments released on Monday, the RBI spoke of calibrated measures needed to manage the country’s monetary policy.
 
“Monetary policy needs to be calibrated in addressing growth risks as inflation remains above the Reserve Bank’s comfort level and macroeconomic risks from twin deficits persist (fiscal and current account),” it said in the monetary development report.

The report also stated that reforms since September 2012 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.”

Although near-term risks to a burgeoning fiscal deficit have waned following the government's recent policies to stick to its fiscal deficit target of 5.3 per cent of GDP, sustainable fiscal consolidation would require cuts in subsidies, the RBI said, adding, “As reforms get executed, monetary policy could increasingly focus on growth revival.”

Even if inflation recedes further, the report said, the wide current account deficit may slow the pace of monetary policy easing.

 The current account gap touched a record high of 5.4 per cent in July-September 2012 and is likely to rise further in the December quarter.

The RBI also said its survey of professional forecasters had lowered the growth forecast for the 2012-13 to 5.5 per cent from 5.7 per cent previously. In October, the central bank lowered its own forecast for 2012-13 growth to 5.8 per cent from 6.5 per cent.

The survey also revised down the average wholesale price index inflation forecast to 7.5 per cent from 7.7 per cent.

In October, the RBI had forecast that inflation would be running at 7.5 per cent by March 2013, though December's rate of 7.18 per cent was the lowest in three years and better than the bank had expected.

On current account assessment, the RBI report noted that growth in 2012-13 is likely to fall below the Reserve Bank's baseline projection of 5.8 per cent set out in the Second Quarter Review (October 2012).

 The index of industrial production (IIP) recorded a dismal growth of 1.0 per cent during April-November 2012. 

The full year growth may fall even below last year's disappointing 2.9 per cent growth, it said. “With a generalised slowdown in consumption as well as investment, a turnaround looks difficult this year.” However, it said that the output gap could start closing in 2013-14 on the back of some revival in investment demand.

Even as fiscal risks moderate in 2012-13, sustained commitment to fiscal consolidation is needed to generate monetary space, the apex bank said.  

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