Macro Eco Review: RBI revises GDP forecast to 5.7%

Moneycontrol Bureau

A day before the monetary policy, the professional forecasters' survey conducted by the Reserve Bank of India revised GDP forecast to 5.7% as against 6.5% in 2012-13 while raising inflation estimate to 7.7% versus 7.3% for the year. Persistent inflation and easy availability of money (liquidity) may to prompt the central bank keeping rates unchanged on Tuesday.

"Going forward, there is a need to calibrate monetary policy factoring in the evolving growth-inflation dynamics as also the progress that may be made in containing the twin deficits. Growth-inflation balance warrants careful policy calibration as growth slows but inflation risks persist," RBI said in the macroeconomic and monetary developments second quarter review 2012-13, released on Monday.

Recently, the government took a series of reform measures to revive the country’s flagging economy. This raised hopes of fresh rate cuts by the banking regulator, which so far reduced 150 basis points cash reserve ratio (CRR) and 50 bps repo rate. CRR is the portion of deposits that banks are mandated to keep with RBI and repo is the policy rate at which banks borrow money from it. Underscoring its policy stance of balancing between growth and inflation, RBI however, apparently pinned such expectation of rate cut immediately.

"The Reserve Bank has calibrated monetary policy in line with evolving growth-inflation dynamics. Without fundamentally changing its policy stance that has primarily sought to contain inflation and inflation expectations over the past two years, it has been ensuring that liquidity conditions do not tighten excessively," said the macro review report.

Also read: Key points of RBI's macro developments review in Q2, FY13

Open market operations (through which it buys back government securities to pump in money into the system), CRR and statutory liquidity ratio (SLR) are the three tools for the central bank to manage availability of money in the system.

Meanwhile, the central bank praised the government reform measures but refrained from sounding gung ho about it unless those are properly executed. Speedy implementations, according to RBI, of recent policy measures announced by the government and sustained reforms are important for turning the economy around.

Despite the government having taken measures of ease its subsidy bill, RBI is of opinion that food, fertilizer and petroleum subsidies remain high and are likely to overshoot the government’s budget estimates.

With the weakening aggregate demand, the investment climate too remained weak. Investment intensions in the new projects sanctioned financial assistance did not show any sign of improvement. Removal of impediments to infrastructure investments hold the key to growth revival, RBI observed.

saikat.das@network18online.com