RBI wants govt to act as it sees growth slowing
RBI wants govt to act as it sees growth slowing
Mumbai: The Reserve Bank of India (RBI) sees India’s growth slowing sharply even as inflation continues to remain at an elevated level.
The central bank’s macroeconomic review for the first quarter, released on Monday ahead of its monetary policy review on Tuesday, said the slowdown in the economy continues and output expansion in 2012-13 is “likely to stay below its potential”.
While bankers and corporations have been asking for a loose monetary policy to boost economic growth, the RBI report said that “decisive policy action backed by credible commitment to a long-term strategy for correcting macroeconomic imbalances and stimulating investment is crucial at this stage to revive confidence”.
If indeed the government does this, it will “provide space for monetary policy to help sustain growth while keeping inflation under control”.
Economists are divided in their assessment of what RBI is likely to do on Tuesday amid deficient monsoon rain in the current June-September season.
“We are expecting a cut in rates because of growth concerns,” said Indranil Sengupta, India economist at Bank of America-Merrill Lynch.
“RBI can wait this time and not cut rates, but a status quo on rates will not help agriculture in a drought-like situation. On the other hand, if they start cutting rates now, it could revive industry in a year when agriculture is struggling. If they wait, it could be too late,” he added.
Expectations of a 7% growth this year are unrealistic, Sengupta said, and added. “We are expecting 5.3% growth.”
Jyotinder Kaur, senior economist at HDFC Bank Ltd, said, “It doesn’t seem that RBI is keen on cutting rates. It has highlighted the risks to growth, but at the same time it wants the growth recovery to be as non-inflationary as possible. But most definitely they will cut their GDP (gross domestic product) forecasts and in all probability increase their inflation forecast closer to 7%, if not 7.5%.”
A survey of professional forecasters showed a sharp reduction in the growth forecast for the fiscal and an increase in that for inflation, the report showed.
The GDP growth rate for fiscal 2013, according to the professional forecasters, is now 6.5%, while inflation is expected to remain at an elevated level of 7.3%.
The previous forecasts were 7.2% for growth and 6.9% for inflation. The latest forecast is consistent with that of the International Monetary Fund.
This forecast is conducted by RBI, but it is not it’s projection. RBI’s forecast for growth and inflation are 7.3% and 6.5%, respectively, which economists expect to be revised in its first quarter policy on Tuesday.
RBI governor D. Subbarao has preferred to target prices as, in the long run, lower inflation creates a conducive investment climate and thus helps shore up economic growth, even as a rise in interest rates impacts such investment decisions in the short term.
“Growth in 2012-13 is likely to remain below potential. Newer risks to growth have arisen from slowing global trade, domestic supply bottlenecks of industrial inputs, coal and electricity shortages, and less-than-satisfactory monsoons so far,” the RBI report said. The growth slowdown is reflecting even in the services industry, which generally remains relatively stable, it added.
The deficient monsoon is expected to play a major role in RBI’s policy decision. Until 27 July, the monsoon was deficient by 21% compared with the long-period average, and as per RBI’s own estimates, the deficiency was 24%. The deficient monsoon will impact kharif crops, especially coarse cereals and pulses, and push food prices up. The recent 15-53% upward revision in the minimum support prices (MSP) for crops will also lead to food prices rising. The average increase in MSP works out to 25.6%, RBI said.
The professional forecasters have, however, kept the agricultural growth rate unchanged at 3%, despite a deficient monsoon.
Two other surveys by RBI— the order books survey, and the inventory and capacity utilization survey—showed a “seasonal improvement in capacity utilization levels in Q4 of 2011-12”, but its industrial outlook survey indicates that capacity utilization has declined in the June quarter of the current fiscal.
Wholesale price-based inflation has persisted above 7% for months, while consumer price inflation remains in double digits. A significant contribution to this inflationary pressure has been through the food and energy segments. Even as global commodity prices have declined, the rupee’s loss against the dollar has nullified the gain.
The rupee has depreciated more than 20% against the dollar in the past one year. It touched its lifetime low of 57.30 to the dollar in June, against 44-45 a year ago. The drop in crude oil prices, to $90 a barrel from more than $115 a year ago, has also been neutralized by the rupee’s depreciation. India imports 80% of its oil. Crude has started gaining and is trading at more than $105 a barrel currently.
“While core inflationary pressures are currently muted, a continued rise in real wages could spill over to core inflation. Persistence of inflation, even as growth is slowing, has emerged as a major challenge for monetary policy,” RBI said.
RBI cut its policy rate by 0.5 percentage point to 8% in its annual policy in April after raising it 13 times since March 2010, but left it unchanged in its June mid-quarterly policy against widespread expectations of a rate cut.
anup.r@livemint.com
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First Published:31 Jul 2012, 08:14 AM IST
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