Mumbai: The Reserve Bank of India (RBI) on Monday said strong rural consumption demand and various monetary and fiscal stimulus measures would sustain domestic demand over the coming fiscal year.
In its macroeconomic review, released ahead of the Indian central bank’s annual monetary policy slated to be unveiled on Tuesday, RBI said the structural components of the Indian economy remain intact despite a global economic slowdown.
Central view: RBI governor D. Subbarao. RBI said the structural components of the economy remain intact, but slump in industrial production, deceleration in demand, and declining exports are major concerns. Abhijit Bhatlekar / Mint
However, it conceded a slowdown in industrial production, deceleration in private consumption and investment demand, and declining exports are the major concerns.
A survey of professional forecasters conducted by RBI has cut the growth rate of gross domestic product, or GDP, to 5.7% for 2009-10, from the earlier 6%.
The economy probably expanded 6.6% in the year ended 31 March, less than the 6.8% forecast earlier, according to the median compiled by RBI from the forecasts.
Despite strong rural consumption demand, the worst is not over for the Indian economy as RBI’s industrial outlook survey of manufacturing firms in the private sector indicates that business expectations indices based on the assessment for January-March 2009 and expectations for April-June 2009 declined sharply by 20.7% and 13.9%, respectively, over the previous quarters.
The combination of the drop in the level of business confidence and the statement on strong rural demand does not give any clear indication on whether the Indian central bank will tinker with its policy rates when it announces its annual monetary policy.
While some economists expect RBI to wait and watch the effect of its until-now aggressive rate cuts, a few others expect another 50 basis points cut in its key policy rates. One basis point is one-hundredth of a percentage point.
“RBI might keep rates on hold for now and evaluate the impact of the previous policy easing on the real segment of the economy,” said Indranil Pan, chief economist of Kotak Mahindra Bank Ltd.
Sherman Chan, Sydney-based economist at credit ratings agency Moody’s, said in a 20 April note that she expects policy rates to be cut by 50 basis points each.
Since October, RBI has brought down its repo and reverse repo rates, or the rate at which it injects in or sucks out liquidity from the system, by 400 and 250 basis points, respectively. The cuts were an attempt to ease the liquidity crunch that swept the global financial system after the September collapse of US-based investment bank Lehman Brothers Holdings Inc.
The Union government worked with the central bank, announcing fiscal measures amounting to 2.9% of the GDP, despite having pressures on the revenue front due to the slowdown.
Most of economists maintain there is room left for further monetary policy easing and a 50-100 basis points cut in key policy rate, given the fall in inflation rates.
RBI said a sharp fall in inflation in the second half facilitated aggressive monetary easing. However, unlike the wholesale-price based inflation (WPI), consumer-price based inflation (CPI) remains high in the country and the “transmission process of lower inflation at the wholesale level to inflation at the retail level has emerged as an important issue in the conduct of the Reserve Bank’s monetary policy”.
High levels of CPI—there are four such measures in India— could be reason enough for the central bank not to ease its rates further. Lower interest rates tend to push inflation higher as money becomes widely available at cheaper rates. RBI said the higher level of CPI as compared with WPI inflation in recent months could be attributed to higher prices of food articles which have higher weight in CPIs.
Various consumer price inflation showed readings of 9.6-10.8% in January-February. In comparison, wholesale price inflation is hovering at 0.18% in early April.
Pointing out that deceleration in credit expansion was observed across the banking system, RBI noted that “it was sharper for the private and foreign banks”. Private and foreign banks have come under criticism, including by Prime Minister Manmohan Singh, for not passing on the benefits of the rate cuts to their lenders.
Bank credit flow moderated to 17.3% in at end-March from 22.3% a year ago.
While noting that the lending rates of banks have begun to exhibit some moderation following significant reduction in policy rates, the central bank said commercial lenders have room to lower borrowing costs further.
Bloomberg and Reuters contributed to this story.