The Reserve Bank of India (RBI) on Monday said recent reforms have reduced the immediate risks for the economy but emphasised on the need for more measures to restore investor confidence.

Flagging concerns about fiscal and external imbalances in the economy, it said that more reforms are required, especially in road and power sectors, to remove the investment bottlenecks.

“The fresh round of reforms that were initiated in September 2012, after a hiatus, has reduced the immediate risks facing the Indian economy... on the whole it appears that the reform measures taken so far have not decisively lifted business sentiments and further action may be needed to restore confidence,” RBI said in its third quarter review of Macroeconomic and Monetary Development.

The monetary policy, RBI said, could focus more on boosting growth after the reform actions are executed. “While government has embarked on a fiscal adjustment path, staying on this course over the medium-term is necessary for providing sufficient space for monetary policy to stimulate growth,” it said.

In the past couple of months the government has taken a host of reforms initiative including opening the multi-brand retail chain for foreign direct investment and also the Union Cabinet has approved hiking foreign investment limits in the insurance and pension sectors.

Earlier this month, the government also allowed partial deregulation of diesel prices, besides limiting the number of subsidised LPG cylinders to nine per family a year.

“Fiscal risks have somewhat moderated in 2012-13, but a sustained commitment to fiscal consolidation is needed to generate monetary space,” RBI said.

The RBI has held interest rates steady for the last nine months since April last year. In that policy review it wanted the government to execute fiscal measures to improve investment climate.

”...There is a long road ahead to bring about a sustainable turnaround for the Indian economy.” RBI said. The economy could start turning around in 2013-14 as the impediments to investments are removed, it added.

“However, weak global economic conditions, domestic business constraints and low confidence levels may keep the recovery modest next year, while the near-term risks to the economy emanating from fiscal and external imbalances remain,” it said.

The RBI further said that the economic growth in the current fiscal is likely to fall below the earlier estimate of 5.8 per cent to 5.5 per cent for 2012-13 and 6.5 per cent for next fiscal.

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