Worsening external sector conditions have become a major reason for worry at the central bank, which is concerned about funding the current account gap, as foreign exchange reserves have depleted.
According to several economists who attended the customary pre-monetary policy meeting with the Reserve Bank of India (RBI) on Tuesday, since there was no stable source of funding the gap, the regulator was concerned that if growth did not pick up, capital flows would suffer.
Most economists highlighted the need for a rate cut to revive the economy, but agreed inflation and inflationary expectations remained a key challenge, as commodity prices and international crude oil prices, in particular, remained high. A majority of the economists were of the view that there should be a cut in repo rate by 25 bps in the upcoming credit policy review on April 17.
Vital numbers on external sector ($ bn)
|Merchandise trade balance
|Current account balance
|Current account deficit* (%)
|Capital account balance
|Economic growth (%)
|E: Estimates; *Current account deficit as per cent of gross domestic product
Source: Prime Minister’s Economic Advisory Council data & government data
The RBI had earlier met industry chambers and Indian Bank Association (IBA). The governor is scheduled to meet the Technical Advisory Committee on Monetary Policy tomorrow.
The demand for a rate cut is primarily to boost economic growth, which slowed to 6.9 per cent in 2011-12 from 8.4 per cent a year before. Growth for 2012-13 has been pegged at 7.6 per cent. RBI raised the policy rate 13 times between March 2010 and October 2011 to tackle inflation and then pressed a pause button for consecutive policy reviews.
The country’s current account deficit (CAD) nearly doubled in October-December and rose to $19.6 billion from $10.1 billion a year earlier, due to a sharp slowing in merchandise and services exports, even as imports grew at a rapid pace, data released by RBI showed.
From September to February, RBI has sold a net $20.14 billion in the spot market, to arrest the rapid fall in the rupee’s value. The rupee lost 15.8 per cent of its value in 2011, when it plunged to an all-time low of 54.30 to the dollar in December.
The trade deficit in October-December widened to $47.7 billion from $31.4 billion a year earlier. According to the central bank, India’s balance of payments experienced significant stress as the trade deficit widened and capital inflows fell far short of the financing requirement, resulting in significant drawdown of forex reserves.
Inflation fell below seven per cent in January and February, mainly due to the statistical base effect. Economists said the advantage of a favourable base will not be there after April.
“There is a view to cut the rate now and if inflation again goes up, then keep the option to raise the rate,” said an economist. However, this view has been countered by the opinion that even a rate cut – which would not be more than 50 basis points – along with a hawkish statement would not boost investor sentiment.