The Reserve Bank of India (RBI) has reiterated the need for careful policy calibration even as growth slows and inflation risks persist.
“Monetary policy needs to be cautious in the interim, focussing on inflation, while using the available space to support growth to the degree it can,” the RBI says on the eve of the second quarter review of its monetary policy.
“Lowering inflation is important from consumer welfare and equity considerations, as also for sustainable growth over the medium-term. If risks to macro economy from inflation and twin deficit recede further, that could yield space down the line for monetary policy to respond to growth concerns,” it adds.
However, it says, speedy implementation of recent policy measures announced by the government and sustained reforms are important for turning the economy around.
Various surveys, including the Reserve Bank’s Industrial Outlook Survey, suggest that business sentiment remains weak. Global growth projections, including that for India, are getting revised downwards.
The median projection for 2012-13 in the Reserve Bank’s Survey of Professional Forecasters has been lowered to 5.7 per cent from 6.5 per cent for growth, while that for average wholesale price index (WPI) inflation is revised upwards to 7.7 per cent from 7.3 per cent.
The RBI says that inflation remains on a sticky path, warranting caution. “Inflation has stayed sticky around 7.5 per cent. Persistent non-food manufactured product inflation, despite the growth slowdown, has emerged as a concern. Consumer price inflation continues to be above wholesale price index based inflation. This divergence is observed even for ex-food and fuel components of the two indices.”
However, the RBI says that while the near-term inflation risks are on the upside, inflation is expected to moderate from the fourth quarter of 2012-13. “Improved supply responses and moderation of wage inflation is vital for bringing down inflation to comfort level,” it addds.
Economic indicators suggest that slowdown has continued in 2012-13. However, recent policy reforms should help in arresting the downturn. “They may, on their successful implementation, support recovery later,” the RBI says.
“With negative output gap persisting, growth in 2012-13 is likely to fall short of the Reserve Bank’s earlier projection,” says the RBI.
“Improved prospects for Rabi, following the late monsoon revival, will partly offset the fall in Kharif output. Contraction in the mining sector continues following a clamp-down on illegal mining. Manufacturing output has stagnated due to weak investment and external demand.”
The RBI reiterates that fiscal consolidation and removal of impediments to infrastructure investments hold the key to growth revival. However, the central bank says that fiscal slippage is likely in 2012-13 despite recent measures by the government. Food, fertilizer and petroleum subsidies remain high, and are likely to overshoot the Centre’s budget estimates.
It also says that aggregate demand is weakening, led by the investment slowdown. Investment intentions in the new projects sanctioned financial assistance remained low in the first quarter of 2012-13. The RBI says that the policy reforms measures have improved market sentiment, strengthening the equity prices and the rupee exchange rate. However, there is need for steps to revive the sluggish primary capital market, so that financing constraints for corporate investments are reduced.