RBI likely continue to ease rates on growth concerns: CARE

The CSO has released its quarterly (Q4 FY13) and annual (FY13) estimates of GDP growth. The numbers come in line with expectations – growth in the last quarter of FY13 stands at 4.8 percent and for the entire year at 5.0 percent, over the last year.

Growth in most sectors has come lower than the previously presented advance estimates of GDP, with manufacturing registering subdued growth and activity in mining and quarrying decelerating. The agri-sector on the other hand has posted better results, with production estimates of rice, wheat and sugarcane being revised upwards.

GDP growth in Q4 FY13
The moderation in GDP growth continues in the fourth quarter of FY13, with overall GDP growth settling at 4.8 percent in Q4 FY13, when compared with 5.4 percent in Q1 FY13 and 5.1 percent in Q4 FY12.

The agriculture and allied industry grew at a lower rate of 1.4 percent in Q4 FY13 when compared to 2.0 percent during the corresponding period in the last year.

Continuing uncertainty in the domestic mining and energy sector due to coal block allocation, ban on mining, licensing issues and concerns on fuel supply, both the mining and quarrying and electricity sector registered lower growth this quarter when compared with the last year.

- Growth in mining and quarrying sector decelerated by 3.1 percent in Q4 FY13, when compared with 5.2 percent growth in Q4 FY12
-The electricity, gas and water supply sector grew by 2.8 percent (3.5 percent)

Construction sector grew by 4.4 percent in Q4 FY13, lower than 5.1 percent in Q4 FY12

Growth in the services sector moderated driven by lower banking sector activity and reduction in government spending in the last quarter, an imperative in lowering the fiscal deficit for the government. Contrary to this trend, the trade, hotels, transport and communications sector posted better performance in Q4 FY13 with growth of 6.2 percent (5.1 percent)

Expectations on Monetary Policy Actions

The RBI time and again has stated that the leg-room available for a rate cut is limited. With WPI headline inflation moderating to lower than 5.0 percent, the RBI in balancing a growth-inflation trade-off now appears to be focusing on the former. Since, January 2013, the monetary authority has cut key interest rates twice by an aggregate of 50 bps with an aim to boost sentiment and revive growth.

Simultaneously, however, concerns on the resurfacing of primary articles inflation and widening of current account deficit (CAD) have turned critical. The recent jump in gold imports has pressured external balance of the economy, especially because exports growth has been muted in a weak global economic environment. With added pressure coming from persistent depreciation of the rupee against the dollar, the RBI is expected to keep a keen eye on developments on the CAD front.

The RBI could likely continue to ease rates on growth concerns, but policy action would greatly be dependent on inflation dynamics and changes in the CAD. There is a 70 percent chance of the RBI reducing interest rates by another 25 bps in the June review, if the WPI continues to register a downward trend. If concerns on inflation and CAD rise above the RBI’s comfort level, it may be expected to maintain a status quo on rates.

Disclaimer: This report is prepared by the Economics Division of Credit Analysis & Research Limited [CARE]. CARE has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE (including all divisions) has no financial liability whatsoever to the user of this report.

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