RBI hints at rate cuts in its report

Says as risks from inflation and twin deficits recede, monetary policy could respond effectively to growth concerns

The Reserve Bank of India has hinted at a rate cut in its Second Quarter Macroeconomic and Monetary Developments report released on Monday. The report says that as macro risks from inflation and twin deficits recede further, it would yield more space for monetary policy to respond effectively to growth concern. High interest rate has been cited by the government and corporates as one of the primary reason for the slowdown.

Inflation, the other major concern, is also expected to come down from the fourth quarter of the current fiscal. This, however, is subject to improved supply responses and moderation of wages, adds the report. Better capacity utilisation is thus necessary for an increasing supply. RBI says that capacity utilisation is at its lowest in the last 13 quarters.  

Liquidity is no longer a concern as the central bank has been proactive with reduction in cash reserve ratio (CRR) and statutory liquidity ratio (SLR) backed by open market operations (OMO). Liquidity is largely in line with RBI’s policy objective, balancing inflation concern and the need to ensure credit supply to support growth. Though government securities yields were range-bound with a softer bias, reflecting improved liquidity, gains in bond market were limited due to concern of further slippages during the year.

Risk aversion by banks on account of rising non-performing assets (NPA) has resulted in lower credit growth.

The report says that various surveys have suggested that business sentiment remains weak, with global and domestic growth projections, including that of India getting revised downwards. For FY13 RBI has lowered GDP projection to 5.7 per cent from 6.5 per cent earlier. On the other hand, average inflation has been revised upward from 7.3 per cent to 7.7 per cent.

RBI, supporting the measures announced by the government earlier in the month, said that the policy measure should help in arresting downturn, which on their successful implementation should support recovery later. Further, augmentation of FDI will help in buffering against possible financing pressures should global risk aversion returns or domestic recovery falters.

However, these measures are unlikely to prevent fiscal slippage in FY13. Food, fertiliser and petroleum subsidies remain high and are likely to overshoot centre’s budget estimates.