RBI lowers GDP growth forecast, rate cut hopes dim

While markets are confident of a low-interest rate regime, the Reserve Bank of India continues to tread cautiously at every step. In its macroeconomic report for third quarter, the central bank mentioned about calibrated (read baby step) measures in managing country's monetary policy. It revised India's GDP forecast to 5.5% in 2012-13 as against 5.7% estimated earlier.

This is no change in RBI's earliar stance aimed at taming inflation even though the rate has eased. India's headline inflation rose 7.18% in December, the slowest pace in the three years. The banking regulator however, sticked to its policy approach of playing a balancing act between high inflation and growth risks.

"Monetary policy needs to continue to be calibrated in addressing growth risks as inflation remains above the Reserve Bank's comfort level and macroeconomic risks from twin deficits persist (fiscal and current account)," RBI said in the monetary development report released on Monday, a day before October-December policy announcement.

"Reforms since September 2012 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. The Reserve Bank's survey of professional forecasters anticipates a slow recovery in 2013-14 with inflation remaining sticky."

Markets were mostly expecting a 25 basis point cut in policy (repo) rate, the rate at which banks borrow money from RBI. It current stood at 8%. Moreover, a slowing growth rate coupled with a bit eased rate of inflation prompted many to expect for a 50 bps reduction in the repo rate. With this macroeconomic survey, many believe, chances of a sharp rate are remote.  RBI had last decreased the policy rate by 50 bps in last Arpil, 2012.

"Growth in 2012-13 may fall below the Reserve Bank's October 2012 projection of 5.8 per cent. Even though a modest recovery may set in from Q4 of 2012-13 as reforms and efforts to remove structural constraints get underway, sustaining this recovery through 2013-14 would require all-round efforts in removing impediments for business activity," RBI said.

Policy makers are currently fighting with the threat of twin deficits. The current account deficit (CAD) to GDP ratio touched a historically high level of 5.4% during July-September quarter in FY13. When total import volumes exceed total export volumes, it is called CAD.

On fiscal front, RBI observed a significant moderation in private consumptions while government expenditure accelerated. The government of late has revised its fiscal deficit target at 5.3% of GDP. Sustainable fiscal consolidation, according to RBI, would require bringing current spending, especially on subsidies, under control and protecting, if not enhancing capital expenditure.

An improvement in the investment climate holds the key to demand revival. This can be realised through sustained reform measures, suggested the report. The industrial and agricultural growth has been sluggish so far.

saikat.das@network18online.com