Mooting a very cautious stand on its forthcoming monetary policy, the Reserve Bank of India (RBI), on Thursday, said it was left with only “very little” space for further easing of monetary policy in this current financial year.
“In view of macro-financial risks that stay significant, headline inflation remaining above the threshold and consumer price inflation remaining high, the space for action for 2013-14 remains very limited. If some of the risks come to fore, policy re-calibration may become necessary in either direction,” the RBI said on the eve of the announcement of its Annual Monetary Policy for 2013-14.
The RBI released its ‘Macroeconomic and Monetary Developments in 2012-13’, which serves as a backdrop to the Annual Monetary Policy Statement 2013-14 to be announced on Friday.
In its earlier policy statements in the last financial year also, the RBI had taken a very cautious stance while reviewing it. Last March — in the mid-quarter review while cutting the repo rate by 25 basis points — the RBI said, even as the policy stance emphasised addressing the growth risks (by cutting rate), “the headroom for further monetary easing remains quite limited”.
In its third quarter review at end-January this year, while cutting the repo rate and Cash Reserve Ratio (CRR) by 25 basis points each, the RBI Governor D. Subbarao said, “There is some space, but limited. We use it with lot of judgment.”
“Using the limited monetary space”, the RBI said on Thursday that it eased monetary policy during 2012-13 in a calibrated manner by cumulatively reducing policy rates by 100 basis points and injecting Rs.1.5 lakh crore of liquidity through outright open market operations. Besides, it injected Rs.1.3 lakh crore of liquidity through reductions in cash reserve ratio since January 2012.
However, it stated that slow-paced recovery was likely later in 2013-14, contingent on improved governance and concerted action to resolve structural bottlenecks, especially in the infrastructure sector. But the RBI cautioned further, “output gap is likely to reduce, but remain negative”.
Headline inflation was likely to remain range-bound in 2013-14, with some further moderation in the first-half of current financial year due to subdued producers’ pricing power and falling global commodity prices, before it increased somewhat in the second-half largely due to base effects, it said.
The RBI said growth was hobbled by structural bottlenecks. Shortages of power, coal and natural gas, stoppage of mining activity in some states following legal enforcements on illegal mining had emerged as a major constraining factor for industrial growth. “Core industries have underperformed in this backdrop.”
The Reserve Bank’s Order Books, Inventory and Capacity Utilisation Survey shows that the slack in capacity utilisation persisted in the third quarter of 2012-13. New orders picked up marginally. Inventory, as a ratio of sales, reached its lowest for finished goods, but highest for raw materials in the past five quarters.
Aggregate demand remained sluggish with inflation adversely impacting real consumption and cyclical and structural factors impeding investment. “Investment decline was accompanied by decline in saving rate as persistence of inflation eroded financial savings of the households”, the central bank observed.
The RBI said that the Current Account Deficit (CAD) risks would continue to stay, though fall in global commodity prices brought temporary respite to it. CAD/GDP ratio for the year 2012-13 was expected to be around 5 per cent, “twice the sustainable level”. CAD in 2013-14, it said, was likely to benefit from moderation in global commodity prices.
Yet, “its sustainability continues to face risk from event shocks that may cause a sudden stop or reversal of capital inflows.”
The RBI said that strong FII inflows, especially in the second-half of 2012-13, augured well for the Indian equity markets and the rupee.
“Divergence between wholesale price index (WPI) and Consumer Price Index (CPI) inflation has widened on account of higher food inflation and other factors such as increase in housing rents and transportation costs,” it said.
Reserve Bank’s survey of outside professional forecasters showed anticipation of a modest recovery with growth in 2013-14 at 6 per cent from 5 per cent and average WPI inflation to moderate to 6.5 per cent from 7.3 per cent.
