Reserve Bank of India on Monday spoke of difficulties in effecting an
interest rate cut as it kept its option open in its quarterly monetary policy on Tuesday citing
high inflation and widening current account deficit as big constraints inhibiting it.
"Given the preponderance of non-monetary factors behind the current slowdown in an environment where risks from high inflation, current account and fiscal deficits still remain, the scope for supportive monetary policy action is constrained", the RBI said in its report on Macroeconomic and Monetary Developments issued on the eve of policy.
The central bank, however, appeared to keep its options open when it said that when the
government's recent economic reforms measures "show up fully and definitely" it would be possible for the monetary policy to increasingly focus on revival of growth.
The RBI's pre-policy review statements comes in the midst of long standing expectations from the government and the industry of an interest rate cut to boost sagging growth.
Meanwhile, the professional forecasters sponsored by the
RBI have lowered the growth projection for the current fiscal to 5.5 per cent from 5.6 per cent projected earlier.
They have also cut the growth forecast for the next financial year to 6.5 per cent from 6.6 per cent.
As regards inflation, RBI said it was likely to moderate below its projection of 7.5 per cent by March-end.
However, it added, "suppressed inflation continues to pose a significant risk to the inflation in 2013-14. As some of the risks materialises, inflation path may turn stick."
Referring to recent reforms initiatives, it said, "(they) 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."
Industry chambers, however, have been
pressing for rate cut to boost growth which contracted by 0.1 per cent in November.
On an overall assessment of macro-economic situation, the RBI said, monetary policy would undertake only calibrated action in view of inflation, which at over 7.18 per cent in December, was much above the central bank's comfort level.
Average WPI inflation, it said, was expected to moderate from 7.5 per cent in 2012-13 to 7.0 per cent in 2013-14.
The economic growth in 2012-13 was likely to fall below its projection of 5.8 per cent, RBI said, adding "output gap may start closing in 2013-14 although at a slow pace on the back of some revival in investment and consumption demand."
The revival of growth, which has remained below potential for the fifth successive quarter might take some more time as "policy initiatives of the government are yet to show up fully or definitively in data," the RBI said.
"Investment intentions in new projects improved marginally in Q2 of 2012-13, but investment is held back by project delays. Coal supply issues facing power sectors are yet to be fully resolved. Road investments have stalled due to issues relating to environmental clearances, land acquisition and financial closures," RBI said.
Referring to the problem of rising Current Account Deficit (CAD), difference between outflow and inflow of foreign exchange, RBI said it was likely to exceed 4 per cent for the second successive year in 2012-13.
"The CAD/GDP ratio reached its highest ever peak of 5.4 per cent of GDP in Q2 of 2012-13. Early indications are that it may increase further in Q3 of 2012-13. CAD has widened mainly due to worsening of trade deficit," RBI said.
Industry chambers, however, have been pressing for rate cut to boost growth which contracted by 0.1 per cent in November.
On an overall assessment of macro-economic situation, the RBI said, monetary policy would undertake only calibrated action in view of inflation, which at over 7.18 per cent in December, was much above the central bank's comfort level.
Average WPI inflation, it said, was expected to moderate from 7.5 per cent in 2012-13 to 7.0 per cent in 2013-14.
The economic growth in 2012-13 was likely to fall below its projection of 5.8 per cent, RBI said, adding "output gap may start closing in 2013-14 although at a slow pace on the back of some revival in investment and consumption demand."
The revival of growth, which has remained below potential for the fifth successive quarter might take some more time as "policy initiatives of the government are yet to show up fully or definitively in data," the RBI said.
"Investment intentions in new projects improved marginally in Q2 of 2012-13, but investment is held back by project delays. Coal supply issues facing power sectors are yet to be fully resolved. Road investments have stalled due to issues relating to environmental clearances, land acquisition and financial closures," RBI said.
Referring to the problem of rising Current Account Deficit (CAD), difference between outflow and inflow of foreign exchange, RBI said it was likely to exceed 4 per cent for the second successive year in 2012-13.
"The CAD/GDP ratio reached its highest ever peak of 5.4 per cent of GDP in Q2 of 2012-13. Early indications are that it may increase further in Q3 of 2012-13. CAD has widened mainly due to worsening of trade deficit," RBI said.
Special 
