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RBI cuts growth forecast to 5.7%, rate cut likely

Last updated on: October 29, 2012 18:43 IST

RBI cuts growth forecast to 5.7%, rate cut likely

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Indicating that a cut in interest rate is likely, the Reserve Bank has said despite high inflation it would take steps to support growth in the half-yearly review of monetary policy on Tuesday.

"Monetary policy needs to be cautious in the interim, focusing on inflation while using the available space to support growth to the degree it can," RBI said in its macroeconomic and monetary development review.

RBI said the Survey of Professional Forecasters has lowered the GDP growth projection to 5.7 per cent from 6.5 per cent for the current fiscal. Average wholesale price based inflation forecast is revised upwards to 7.7 per cent from 7.3 per cent.

It said the global growth prospects, both in advanced and emerging economies, have weakened and the euro zone troubles have affected business confidence and caused deceleration in global trade.

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Photographs: Reuters.
Tags: RBI , Reserve Bank , GDP

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"Risks of spillovers from global financial markets remain. Unconventional monetary policies have transitorily moderated uncertainties, but the underlying stress has not diminished with incomplete deleveraging and unfinished financial sector reforms," RBI said.

It said sustaining the reform initiatives of the government would be the precursor for a turnaround in economic activity.

The government has in the recent past undertaken a host of reform initiatives including hiking diesel prices by over Rs 5 a litre and foreign investment norms for retail, pension, insurance, information and broadcasting sector.

RBI said aggregate demand is weakening, led by the investment slowdown. However, persistent high core inflation remains a cause of concern.

In its last policy review, RBI held interest unchanged, though it had lowered CRR by 0.25 per cent to infuse Rs 17,000 crore liquidity into the system. 

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Image: A worker inside a steel factory at Ludhiana.
Photographs: Ajay Verma/Reuters.
Tags: RBI , CRR

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RBI cuts growth forecast to 5.7%, rate cut likely

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The RBI said the recent spate of reform measures have helped in arresting the downfall in growth, but called for a greater coordination between different government agencies and removal of structural bottlenecks on infrastructure as the key factors for revival.

"It is necessary to remove the pending constraints in the power, coal and road sectors at the earliest ... Fiscal consolidation and removal of impediments to infrastructure investments hold the key to growth revival," RBI said.

It said there would be fiscal slippages during the year, beyond the budgeted 5.1 percent deficit, and that the final number may not be better than last fiscal's 5.8 per cent.

Earlier in the day Finance Minister P Chidambaram had unveiled a five year roadmap for fiscal consolidation pegging the fiscal deficit for the current fiscal at 5.3 per cent by bringing in tax reforms and expenditure management.

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Photographs: Reuters.
Tags: RBI

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The budgeted fiscal deficit for the current fiscal was 5.1 per cent. "As macro-risks from inflation and twin deficits recede further, that could yield space down the line for monetary policy to respond more effectively to growth concerns," it said.

The WPI inflation as of September stood at 7.81 per cent, much above the RBI comfort level of 5-6 per cent.

While a majority believes RBI may go in for a cut in the cash reserve ratio (CRR) or the amount of deposits parked with RBI, a few also say a cut in the policy rate (repo) would be a good way of address the issue of sagging growth.

Blaming the high inflation on a wage-price spiral, RBI said, "In the short-run, inflation may turn out to be slightly higher than anticipated ... It is likely to soften from Q4 (January-March period)".

On growth, RBI said, it will fall below its July estimate of 6.5 per cent, but a "modest recovery" can be expected later during the year. Economic growth fell to a nine-year low of 6.5 per cent in 2011-12.


Image: Men work at the construction site of a high-rise commercial building in New Delhi.
Photographs: Parivartan Sharma/Reuters.
Tags: RBI , WPI , CRR

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