The Reserve Bank of India’s (RBI) first quarter review of monetary policy has painted a grim picture of the economy. Without actually saying so, the RBI is reiterating what Fitch Ratings said a month ago. The global rating agency in June had said India had entered a period of stagflation — a situation where economic growth is low and inflation is high.
The central bank has consequently revised downwards the growth projection for FY13 to 6.5 per cent from 7.3 per cent, as industrial activity has not picked up and the monsoon remains deficient. The baseline projection for wholesale price index (WPI) inflation for March 2013 has also been revised to seven per cent from 6.5 per cent. India is not likely to benefit from falling commodity prices across the world, as the rupee’s depreciation has nullified that fall. The weaker rupee has not helped exports either. Though imports have slowed, the trade deficit remains a concern. Leif Eskesen, chief Asean and India economist at HSBC, explains: “The wide current account deficit also acts as a constraining factor for the RBI, considering the weak global economic and financial conditions. While the trade numbers so far for Q1FY13 suggest a narrower deficit, it remains wide and in need of attention.”
Economists say RBI’s commentary implies the worst is not over. Even after revising the growth projection downwards, risks to growth remain, as global growth estimates have also been revised marginally downwards. Dhananjay Sinha, strategist and economist at Emkay Global, says: “The possibility of further downgrade to RBI’s projection and further elevation to inflation is high. We have already lowered our real gross domestic product (GDP) growth projection to 5.5 per cent from six per cent earlier, in the wake of deficient monsoon.” Given that RBI has not taken into consideration the impact of a weak monsoon on the agri-sector, GDP growth and the resultant impact on other components of GDP, further downside risks persist.
Over the past months, several economists rooted for a rate cut on the basis of lower core inflation. However, RBI has dashed this theory by saying: “The decline in non-food manufactured products inflation has not been commensurate with the moderation in growth. Input price pressures on account of exchange rate movements and infrastructural bottlenecks in coal, minerals and power may exert upside pressure on non-food manufactured products inflation.” The risks, says RBI, are not only local. The apex bank has cited the looming “fiscal cliff” that faces the US in 2013 and the weakness in the Euro zone. Eskesen believes though global economic conditions are a worry, it’s premature for RBI to act in response to these. He says if things do deteriorate, “it is better for the RBI to have preserved the little powder they currently have left”.
