The Reserve Bank of India on Thursday warned of limited space for further easing of its monetary policy, a day before its annual monetary policy announcement.
RBI is widely expected to cut interest rates for the third time this year.
The Reserve Bank of India on Thursday released its report on Macroeconomic and Monetary Developments. The document serves as a backdrop to the Monetary Policy Statement 2013-14 to be announced on May 3, 2013. "In view of macro-financial risks that stay significant, headline inflation remaining above the threshold and consumer price inflation remaining high, the space for action for 2013-14 remains very limited. If some of the risks come to fore, policy re-calibration may become necessary in either direction," RBI said in the report.
Noting that the recent fall in the prices of gold and crude give a "much needed relief", it said being complacent on a temporary phenomenon would be "myopic".
The central bank has already reduced key interest rate by 1 per cent during 2012-13 and pressure is mounting on it to further cut rates in the annual policy to boost growth, which fell to a decade's low of 5 per cent in the last fiscal.
On inflation, the report said the trend of downward spiral will continue through first half, while suppressed inflation in form of upward revision in energy prices and a base effect will lead to an increase in the second half.
A revival in
growth in the current fiscal is likely, but the
recovery would be modest in backdrop of stagnating industrial output, RBI said.
A survey of professional forecasters sponsored by RBI expects the growth to improve to 6 per cent in 2013-14, and the average headline inflation to moderate to 6.5 per cent.
The nearly 20 per cent fall in commodity prices, and inflation at a 3 year low of 5.96 per cent in March, has led to expectations among the industry of cut in key policy rates.
The RBI conceded that its policy rates have been one of the reasons for the growth to dip, but maintained that a rate cut alone will not drive up the growth.
For the growth to go up, "we will have to see greater action on the governance front", coupled with improving supply side bottlenecks, it said.
"Recovery at the current juncture will critically depend on supply-side action to remove a host of micro-constraints and structural bottlenecks that impede production and investment, especially in growth driving sectors such as road and power" RBI said.
The central bank also called for a public investment stimulus "balanced with offsetting reductions" in expenditures, along with removing the supply side bottlenecks, to revive the economy.
The report also said that if the government continues with its recent efforts of curbing expenditure in order to meet the fiscal consolidation target, it is likely to reduce pressure on the
CAD .
The CAD/GDP ratio rose to a record 6.7 per cent in third quarter of 2012-13. RBI said that notwithstanding likely improvement in last quarter, the CAD/GDP ratio is expected to be at a new high of around 5 per cent for the year 2012-13, which is about twice the sustainable level.
Highlights of RBI's Macroeconomic and Monetary Developments (2012-13) report:- Macro-financial risks require cautious monetary policy stance ahead
- Global growth likely to stay sluggish, commodity price inflation soft
- Slowdown persists in the economy with services sector witnessing moderation
- CAD risks stay though fall in global commodity prices bring temporary respite
- Monetary conditions may evolve with macroeconomic developments and shifting growth-inflation dynamic
- Inflation risks remain despite moderation in headline inflation
(With Agency Inputs)
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