Growth prospects better but rupee fall to spike inflation: RBI

Central bank says growth depends on removal of supply constraints, good governance

The Reserve Bank of India (RBI) on Thursday cautioned the falling rupee would exert pressure on the inflation front. However, it provided some hope on economic growth, saying it expected this to be more than the five per cent of last financial year.

“There is a need for close attention to food management and taking policy action to address structural factors that constrain agricultural supply responses...the pass-through of the depreciation of the rupee’s exchange rate by about 11 per cent in the first four months of 2013-14 is incomplete and will put upward pressure, as it continues to feed through to domestic prices,” RBI said, adding inflation pressures were already visible.

On growth, it said, “Recovery is possible and can take shape later in 2013-14, but is predicted on better governance, removal of supply constraints and maintenance of stability.”

The central bank added despite new risks emerging on the global and domestic economic fronts, the real gross domestic product growth outlook for 2013-14 was better than in 2012-13, owing to growth-supportive measures taken by the government and the good southwest monsoon. According to RBI, the normal and spatially well-distributed rainfall so far this season augers well for the agricultural sector and is expected to boost demand for industrial goods and services in rural areas. RBI’s foodgrain production-weighted index showed rainfall was 10 per cent above normal till August 13 this monsoon season. “Ample rainfall has resulted in an improvement in the water shortage levels in reservoirs,” RBI said in its annual report.

It added these improvements would benefit the kharif and rabi crops, as also hydropower generation. “Encouraging prospects for crops auger well for rural demand. The current slowdown, in any case, has impacted economic activity in urban areas more than in rural areas. As such, the rural economy could provide some buffer on the back of a satisfactory monsoon,” said the central bank report.

“The emerging macroeconomic scenario for 2013-14 is challenging, amid the wide current account deficit, risks to fiscal targets, persistence of high consumer price inflation, risk of exchange rate depreciation feeding into inflation, slowing growth and deteriorating asset quality,” RBI said.

It reiterated monetary policies needed to be carefully calibrated to maintain stability without compromising growth.