May 03, 2013, 11.53 AM IST | Source: Moneycontrol.com

RBI monetary policy: 4 key risks to Indian economy

A high current account deficit, over reliance on capital flows to fund that, weak busines and consumer confidence, and supply constraints in the economy are the four key threats to the economy.

Moneycontrol Bureau

The RBI Friday cut the benchmark repo rate by 25 basis points as expected by the market, but warned that further reduction of interest rates could be hard to come by.

Following are the four key risks that the RBI sees to the economy:

* The biggest risk to the economy stems from the current account deficit (CAD) which, last year, was historically the highest and well above the sustainable level of 2.5 per cent of GDP. A large CAD will put pressure on servicing of external debt.

* Financing a large CAD exposes the economy to the risk of sudden stop and reversal of capital flows. Global liquidity situation could quickly alter for emerging economies, including India, due to adverse global developments.

* Investment sentiment remains inhibited owing to subdued business confidence and dented business profitability. Borrowers have become risk averse because of governance concerns, delays in approvals. For lenders, risk aversion stems from the erosion of asset quality.

* Effectiveness of monetary policy could be undermined by supply constraints in the economy. Food price pressures, upward revisions in the minimum support prices and rapid wage increases are leading to a wage-price spiral. 

Also read: RBI sees FY14 GDP at 5.7%, inflation target 5%

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