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Growth ball in govt’s court, says RBI

business Updated: Jul 30, 2012 23:03 IST
HT Correspondent
HT Correspondent
Hindustan Times
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The Reserve Bank of India (RBI) on Monday warned that patchy monsoons can knock up prices and trim farm sector and national income growth, obliquely hinting that the central bank was unlikely to cut interest rates. It complained of a cramped “monetary policy space” on the eve of its quarterly review.

“Monetary policy space needs to be created through fiscal adjustment and structural measures to improve supply conditions ...” the RBI said in its Macroeconomic and Monetary Developments, which is customarily released a day ahead of the policy review.

The central bank also placed the onus squarely on the government to revive growth and investment by slashing subsidies and spurring investment.

“Corporate sales decelerated along with continued decline in profits and could adversely impact investments ahead. In this situation, crowding-in of private investment demand by public investment spending stimulus while aggressively cutting expenditure on subsidies hold the key to growth revival,” RBI said.

Elevated inflation — it was 7.25% in June — has made the task difficult for RBI governor Duvvuri Subbarao and his team.

They are battling to prescribe policies for an economy nursing multiple wounds inflicted by policy logjam, high prices and a shaky world economy. “Fiscal space needs to be created by curtailing subsidies and significantly boosting government capital expenditures to provide an investment stimulus to the economy,” the RBI said.

Economists said that monsoon failure is going to pose further challenges to policymakers and test the RBI’s resolve to stick to its anti-inflationary stance. Monsoon rains, critical for summer-sown crops, have been 21% deficient so far. The near-term outlook on inflation is marked by a slew of upside risks despite a significant slowdown in growth, the RBI said.

"Persistence of inflation, even as growth is slowing, has emerged as a major challenge for the monetary policy," the RBI said in its report.