Reserve Bank says monetary policy easing hasn't helped

Growth expected to remain below potential for the third year in succession during FY14

The Reserve Bank of India (RBI) has admitted to having been unable to use monetary policy to revive investment.

“Revival of investment has become a major macro-economic challenge at the current juncture. Monetary policy easing in 2012-13 has not succeeded in turning (it) around,” said RBI’s Macroeconomic and Monetary Developments in 2012-13, issued today.

It said the logjam associated with structural bottlenecks in the mining and infrastructure segments persisted and needed to be resolved. Otherwise, the limited available space for monetary policy could get quickly used up without stimulating aggregate demand and real activity.

Data showed both saving and investment rates declined in 2011-12. All three sectors — households, private and public sectors — have seen a slowing in saving during this period. Within household saving, while the financial saving rate declined, the physical saving rate rose as households turned to physical assets as an inflation hedge.

The central bank also said that given the continued dismal performance of industry and evidence of a slowing in services, growth is likely to have remained subdued in the fourth quarter of 2012-13.

“Sustained efforts by the government to expediting environmental clearances and land acquisition are needed to turn around growth in core industries,” said RBI.

It said the constraints facing the infrastructure sector needed to be addressed. On its part, it had recently relaxed the norms for external commercial borrowing for infrastructural finance companies, and eased the norms for treating bank loans to public-private partnership projects as secured finance, subject to conditions.

On the global front, a meaningful recovery in the euro area was likely to take somewhat longer. In this environment, growth in India is excepted to remain below potential for a third year in succession during 2013-14, said RBI.

Data showed the pattern of financing the fiscal deficit for 2013-14 displayed continued reliance on market borrowings, budgeted to finance 89 per cent of the gross fiscal deficit. “If market borrowings are contained within the budgeted amount, it could provide some monetary space,” said RBI.