Rate joust

Better to make peace with reality by yielding ground a few percentage inches at a time. Giving the economy the benefit of the doubt on the interest rate front comes naturally to RBI, more so if the inevitable clamouring for further rate cuts in coming months force it to ignore reality and yield to government and industry pressure.

However, by knocking off 25 basis points from the policy repo rate and leaving CRR untouched, the apex bank has also  done well to exhaust any further demands of "policy easeouts" in the next six months.

While growth has halved from 9.2 per cent in the fourth quarter of 2010-11 to 4.5 per cent in the third quarter of 2012-13, RBI has reason to believe that economic activity will remain subdued during the first half of this year with modest pick-up in the second half.
But this will be subject to a better inflation outlook for the second half of 2013-14, amelioration of supply constraints, commitment to fiscal consolidation and less pressure on balance of payments which have not shown progress despite the trade gap narrowing in March. Consequently, a successive pruning of interest rates alone may not serve as adequate growth stimulus. Inflation is expected to be range-bound at around 5.5 per cent in fiscal 2014, but lowering it to the 5 per cent range, well above RBI's comfort zone, cannot be contingent on monetary policy alone. Lowering inflation to the 3 per cent range in the medium term is a challenge in terms of meeting demand-supply constraints, high commodity prices and renewing investor faith in the economy — where Prime Minister Manmohan Singh is running out of options.

It would be fair to say that economic recovery has not stalled going by agricultural growth and resurgent consumer demand, but the growing number of companies which missed analyst expectations for sales during the March quarter is noteworthy. The government has worked on revising GDP growth forecasts more than twice in the past fiscal without any real hope of meeting its targets. Such revisions do little more than keep the present growth rate on the track it has followed for the past three years. They do little to change the soft growth readings fanned by political dilly-dallying, slow domestic economic activity and heightened uncertainty — which need a will to tackle fiscal deficit through structural policies, proactively contain inflation risks and implement pending investment projects. RBI has done well to indicate that enough is enough.

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