Inflation a big worry, RBI says on policy eve

Calls for decisive fiscal policy action to revive growth

A day before the first-quarter review of the monetary policy, the Reserve Bank of India (RBI) has made it clear persistent inflation will continue to be its focus area, even as economic growth is expected to moderate further.

Painting a gloomy picture of the economy today, the RBI highlighted the need for non-monetary policy measures to spur investment activity. In its Macroeconomic and Monetary Development report, the central bank said “early indications for Q1 of 2012-13 suggest that growth is likely to remain subdued. While growth risks are significant, policy choices have been complicated as inflation remains above the comfort level”.

 

“The near-term outlook on inflation continues to be marked by a number of upside risks, despite the significant slowdown in growth,” the RBI said. An RBI survey of economists forecast the Indian economy would grow at 6.5 per cent in the fiscal year that began on April 1, from the 7.2 per cent forecast in a survey three months ago.

PRESSURE POINTS

• Financial markets to stay under pressure on global uncertainty
• Financing large current account deficit difficult in face of slowing foreign investment flows 
• External debt to rise as increased debt flows bridge financing gap
• Lower deposit growth can adversely affect liquidity 
• Need to address non-monetary factors constraining growth
• Need to remove constraints on FDI to improve investment climate

According to the central bank’s estimate, financial assistance in new projects moderated to Rs 2.1 lakh crore in 2011-12, down from Rs 3.9 lakh crore in the previous year. “Corporate investment is expected to decline further during 2012-13,” it said.

In April, the RBI had projected 7.3 per cent growth for 2012-13, now expected to be revised downwards in the wake of an all-round slowdown in economic activity.

“The RBI is likely to lower its GDP growth projection for FY13 to around 6.5 per cent from 7.3 per cent in the April policy meeting, due to weaker global growth prospects, the monsoon and continued sluggishness in industrial output growth,” said Sonal Verma and Aman Mohunta, economists at Nomura. The economists expect the RBI to hold rates in the policy review tomorrow.

The central bank reiterated that factors apart from interest rates were responsible for weak growth. “The capacity of investment to respond to monetary policy actions to stimulate growth is conditional on an improvement in non-monetary factors that have impacted investment in the current cycle,” the RBI said.

The central bank is widely expected to hold rates in tomorrow’s policy meeting at a time when global central banks have eased monetary policy. Mindful of various central banks’ policy easing, the RBI highlighted the benign inflation conditions in those economies as an enabling factor in cutting rates.