Modest improvement in growth is expected in H2 FY14-RBI

The Macroeconomic and Monetary Developments, Second Quarter Review 2013-14

The RBI in its Macroeconomic and Monetary Developments, Second Quarter Review 2013-14 report released today, stated that modest improvement in growth is expected in the second half (H2) of 2013-14 following a rebound in agriculture and an improvement in exports. However, a fuller recovery is likely to start taking shape towards the end of the fiscal year on the back of current steps to clear impediments that were stalling projects.

Meanwhile, it raised concern stating that overall demand conditions remain weak amid deceleration in private consumption and fall in investment. However, a good monsoon and pick-up in exports, if sustained, could provide some momentum. At this stage, demand management requires balancing fiscal consolidation with investment support.

On the WPI front, the report said that it is ruling above the Reserve Bank's comfort level and may remain range-bound around the current level during H2 of 2013-14. Moreover, the persistence of high CPI inflation remains a concern. The good monsoon should have a salutary effect on food inflation, but second-round effects from already high food and fuel inflation could impart upside pressures on prices of other commodities and services.

The central bank said that the external sector risks have reduced as CAD is likely to moderate since Q2 of 2013-14. The trade balance has responded to the policy measures taken; exports have picked up and gold imports have declined. Further, broad money growth is largely in line with the Reserve Bank's indicative trajectory and credit growth has accelerated with greater recourse to bank finance by corporates. However, while financial markets have rallied, near-term uncertainties on account of 'tapering' continue to be a concern. The RBI said monetary policy faces an unenviable task of anchoring inflation expectations, amid tepid growth and weak business confidence. It is, therefore, important to craft policy responses so that growth concerns are addressed in an environment of stable prices.

Meanwhile, the Reserve Bank's 25th round of the Survey of Professional Forecasters outside the Reserve Bank indicated a slowdown in growth. The median growth forecast for 2013-14 was revised downwards to 4.8% from 5.7% in the previous round, which is lower than the growth of 5.0% registered during 2012-13. Average WPI inflation is expected to remain 6.0% during the current year.

Professional forecasters anticipated a reduction in the current account deficit (CAD) with a median forecast at 3.5% of GDP in 2013- 14. The fiscal deficit is projected to be 5% of GDP in 2013-14 from 4.8% of GDP projected earlier.

The forecast for money supply (M3) has remained same at 13% in 2013-14. Bank credit growth forecast for 2013-14 has been revised upward to 15.3% from 15% in the previous round.

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