India's potential growth rate below 6%: RBI report

With growth trending below the 5 per cent mark for three successive quarters, the Reserve Bank of India on Tuesday pegged economic expansion at less than 6 per cent from the earlier expectation of over 8 per cent.

"The wide range of estimates using alternative techniques, on balance, suggests that currently the potential growth may be even somewhat lower than 6 per cent," RBI said in its Macroeconomic and Monetary Developments Report released on Tuesday.

It said a decline in financial savings, sluggish growth in capital formation over successive quarters, persistently high inflation and low business confidence are the major reasons for the revised estimate.

However, it said a modest recovery is likely to take shape in 2014-15.

The document said potential growth, which hovered at 8-8.5 per cent levels in the period from the second quarter of 2005-06 to the second quarter of 2008-09, has gone down to 6 per cent.

RBI Governor Raghuram Rajan's predecessor D Subbarao had once suggested that the potential growth of the economy was 7.3 per cent.

A survey of potential forecasters done by the RBI revised growth for FY15 to 5.5 per cent from the earlier estimate of 5.6 per cent.

On inflation, one of the key factors that forced the RBI to keep a tight monetary policy, which in turn affected growth, the document said that the disinflationary path is moving as expected but stressed on the need to be vigilant.

Warning of upside risks to inflation in FY15, it said the recent declines in CPI inflation were primarily driven by lower food prices, the benefit of which would wear out with seasonal changes.

CPI inflation, which assumed greater focus under Rajan, eased by over 3 percentage points to 8.1 per cent in February, while the RBI is targeting 8 per cent by January 2015.

The professional forecasters also lowered their estimate on the average CPI during FY15 to 8 per cent from 8.5 per cent earlier.

"Most recently, export growth has slowed partly because of slowdown in demand in partner countries as well as a softening of prices of exports of petroleum products and gems and jewellery (offset by a reduction in the prices of oil and gold imports)," Rajan said.

"Whether the export slowdown persists as global growth picks up once again remains to be seen. In February, there was a turnaround in portfolio flows as investors largely priced in the effects of taper by the US Fed and responded to economic and geo-political developments in emerging markets with re-allocations," he added.

On liquidity, he said the central bank will continue to monitor conditions and ensure adequate flow of credit to the productive sectors.

"Liquidity conditions have tightened in March, partly on account of year-end ?window dressing? by banks, though an extraordinary infusion of liquidity by the Reserve Bank has mitigated the tightness," he said.

The Reserve Bank will propose measures to reduce such practices, he added.

Bank of Baroda Executive Director Rajan Dhawan said the RBI will wait for additional data before deciding on the next policy.

According to State Bank of India Managing Director P Pradeep Kumar, the RBI's next policy would be data driven.

The second bimonthly monetary policy statement is scheduled to be announced on June 3.