Reserve Bank of India Governor D. Subbarao, on Thursday, warned of upside risks to inflation and expressed worry over the high current account deficit, denting hopes for rate cuts and sending bond yields to a two-week high and the rupee to a ten-month low.
Dr. Subbarao said the current account deficit, which hit a record high 6.7 per cent of GDP in the December quarter on heavy oil and gold imports, would be a key factor in monetary policy decisions.
The RBI has cut policy interest rates by 25 basis points at each of its three reviews in 2013. Investors and analysts had generally expected another cut at its next review, on June 17.
“Growth is significantly moderated, inflation is somewhat off its peak but there are several upside risk factors, the balance of payments is under stress and investments have to pick up,’’ Dr. Subbarao said during a speech here.
Annual consumer price inflation slowed to 9.39 per cent in April, but was still significantly higher than wholesale price index inflation at 4.89 per cent.
On Friday, the Centre is expected to release March quarter GDP growth. Weakening commodity prices had bolstered hopes of easing pressure both on the current account deficit and inflation, although Dr. Subbarao warned against complacency.
Global prices
“Global prices, especially commodity prices, certainly softened in the last few months. But we cannot take the soft prices for granted,’’ he said.
High fiscal deficit, Dr. Subbarao said was a problem that exacerbated inflationary pressure and impeded monetary transmission. “If done wisely, fiscal consolidation will actually support growth ... The biggest challenge for fiscal consolidation is political economy, politicians, especially politicians in democracies,” he said.
The government expects to bring down fiscal deficit to 4.8 per cent in the current fiscal, from 5.2 per cent in 2012-13.
On non-performing assets (NPAs), especially in the context of advances to the power sector, Dr. Subbarao said the situation was ‘disturbing’. “I hope NPA levels should improve,” he said.
