Monetary review: Economists expect repo rate cut, slippage in fiscal deficit

With the Reserve Bank of India (RBI) set to take a call on interest rates on Tuesday, a survey of economists has said economic growth in the next financial year would be 6.7 per cent. They also said a cut in the policy rates is possible in the coming policy review.

The Economic Outlook Survey conducted by the Federation of Indian Chambers of Commerce and Industry said the “eventual interest rate fall will trigger consumption-led recovery to the industrial production, which shall bail the Indian economy out of the present situation of the twin deficit.”

“The revival in sentiment reflects cautious optimism and is an indication of improved sentiment post September 2012, mainly due to government’s renewed thrust to the reforms agenda,” said Ficci president and country head of HSBC India, Naina Lal Kidwai.

Industrial production has slumped this financial year, witnessing a decline in five of the eight months till November. In November, it saw a contraction of 0.1 per cent.

This has resulted in industry further pressing its demand for a rate cut. The surveyed economists expect a repo rate cut of 25-50 basis points (bps) in the third quarter review. Also, the majority felt a reduction of 75-100 bps through FY14 is likely.

RBI Governor D Subbarao hinted at a rate cut in January, in the previous review, provided inflation showed a downtrend and adequate steps were taken by the government towards fiscal consolidation.

However, in recent days, he has said inflation remains way above the apex bank’s comfort zone and the recent rise in diesel prices is certain to add to the price spiral.

Wholesale price index inflation declined to a three-year low of 7.18 per cent in December, while inflation based on the consumer price index rose for a third month in December to 10.56 per cent. The survey also predicts an inflation level of 6.5-7 per cent for 2013-14.

Further, the economists felt the slippage in fiscal deficit in 2012-13 might be 50 bps, taking it to 5.6 per cent of GDP against the revised budget estimate of 5.1 per cent.

The consensus fiscal deficit estimate in 2013-14 is 5.1 per cent, indicating the process of fiscal consolidation will be “long and arduous.”

The participating economists also indicated that among the varying objectives on the immediate government reform agenda, implementation of the Goods and Services Tax should be the top priority.

The Ficci Economic Outlook Survey was conducted between December 2012 and January 2013. It drew responses from 20 Indian economists from different sectors, with most of the responses coming from the banking and financial services sector.