Even as the markets are expecting a rate cut by the central bank, the Reserve Bank of India (RBI) has asserted that the widening current account deficit (CAD) has become a major constraint on easing monetary policy.
The RBI, nevertheless, feels that the “monetary policy could increasingly focus on growth revival” as reform actions get executed.
This articulation by RBI gives some hope to markets that the apex bank may cut its indicative policy rate by 25 basis points.
“With the CAD turning out to be a record high of 5.4 per cent of GDP in the second quarter of 2012-13, further caution is warranted while framing monetary and fiscal policies,” the RBI said in its report on macro-economic developments in the third quarter, on the eve of its monetary policy review.
Expecting more fiscal policies from the government, the RBI said, “there is little alternative but to use expenditure-reducing policies in addition to expenditure-switching policies to bring CAD down to a more sustainable level of around 2.5 per cent of GDP.”
“The balance of macro-economic risks suggests continuation of a calibrated stance,” it added. Further, it said that while growth remained low, inflation concerns had not dissipated.
Consumer inflation remained high, and even the headline inflation remained above the comfort level. The central bank admitted that “growth in 2012-13 might fall below the Reserve Bank’s October 2012 projection of 5.8 per cent. “Even though a modest recovery may set in from the fourth quarter of 2012-13, as reforms and efforts to remove structural constraints get underway, sustaining this recovery through 2013-14 will require all round efforts in removing impediments for business activity,” the RBI said.
“Although inflation is likely to moderate to below the baseline projection of 7.5 per cent for March 2013 set in the October policy, the direct and indirect impact of the recent increase in diesel prices would exert some upward pressure on overall price level. Suppressed inflation continues to pose a significant risk to inflation trajectory in 2013-14 and as some of these risks materialise, “inflation path may turn sticky,” it added.
