In its annual monetary policy statement for 2013-14, the Reserve Bank of India was not expected to depart from the cautious stance that has characterised its recent policy statements. Therefore, the reduction in the policy repo rate by just 0.25 percentage points to 7.25 per cent has not caused much disappointment, although there were some who were hoping for a similar cut in the Cash Reserve Ratio too. Whatever expectations there were of more generous monetary easing were dashed by the RBI’s report on the macro economy which was released a day ahead as a backdrop to the monetary policy statement. The report, after listing various macro-financial risks, said that “the space for action for 2013-14 remains very limited.” In its March policy statement too the RBI had conveyed the same message. These statements are, however, not cast in stone and much would depend on the rapidly changing growth-inflation dynamic in India and abroad. For now, inflation remains a big worry, even though WPI inflation for March 2013 had turned out to be lower than the RBI estimate. For 2013-14, the RBI expects it to be range bound, at around 5.5 per cent, with the March 2014 target even lower at 5 per cent. The Consumer Price Index-based inflation rate remains in double digits, a point surprisingly not highlighted by the RBI.

Economic growth during the current year is expected to be not more than 5.7 per cent, which is far lower than the 6.4-6.5 per cent that the Prime Minister’s Economic Advisory Council and, earlier, the budget had estimated. This is another instance of the central bank being cautious, no doubt prompted by its expectation of sluggish performance in both industry and services. Interestingly, the RBI’s baseline growth projection of 5.5 per cent for last year turned out to be higher than the official estimate of 5 per cent. Among the major macroeconomic risks, the biggest is the current account deficit, which last year was at its historic high and well above the 2.5 per cent level which the RBI considers to be sustainable. As much as the size of the CAD, its financing exposes the economy to the risk of sudden stop and reversal of capital flows. The advanced economies from where these flows originate themselves face an uncertain economic outlook. Within India, a growth revival is not possible without a revival in investment. But business confidence is at a low and both borrowers and lenders have become risk averse. Finally, the effectiveness of monetary policy in easing inflation pressures could be undermined by supply constraints in the economy, especially in critical areas like food and infrastructure.

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