RBI to review its credit policy today
The Reserve Bank has indicated that it may not cut interest rates to promote growth in its policy review as inflation, which came down in December, still poses a risk to the economy.business Updated: Jan 24, 2012 09:14 IST
The Reserve Bank has indicated that it may not cut interest rates to promote growth in its policy review as inflation, which came down in December, still poses a risk to the economy.
The GDP growth rate during the current fiscal, the RBI said, is likely to fall below its earlier projection of 7.6 %, though inflation may moderate to 7 % by March-end.
"The critical factors in the rate action ahead will be core inflation and exchange rate pass-through (impact of rupee depreciation on oil prices)... Monetary actions will need to strike a balance between risks to growth and inflation," said the Macroeconomic and Monetary Developments Review released by the RBI on the eve of its third quarter policy announcement.
The RBI has increased interest rates 13 times since March, 2010, to contain inflation and India Inc has been demanding a cut in the rates to arrest declining economic growth, which is expected to moderate to 7 % in 2011-12 from 8.5 % a year ago.
The RBI-sponsored survey by professional forecasters has revised the growth projection for the current fiscal downward to 7 %, which is lower than the central bank's projection of 7.6 %.
"Growth is likely to turn weaker than earlier anticipated," the RBI said.
The RBI further said, "Even as the growth slowdown emerges as the major challenge, inflation risks persist, posing a challenge for monetary policy in achieving low and stable inflation with minimal sacrifice of growth."
Pushing for fast-tracking of economic reforms like reducing subsidy and implementing DTC and GST to arrest fiscal deficit, the RBI said its monetary actions were neutralised by the expansionary policies of the government.
RBI said that unless fiscal reforms are expedited, the Centre could miss the rolling target of fiscal deficit at 4.1 % of GDP for 2012-13 as set out in 2011-12 Budget
"Prospectively, improvement in fiscal situation in 2012-13 is not only contingent upon the growth performance but also on the progress in implementation of tax and expenditure reforms," RBI said.
On the expenditure front, it said, the government needs to move towards deregulation of pricing of diesel for controlling its expenditure on petroleum subsidies.
The government will face additional pressures on account of food subsidies when the proposed Food Security Bill is enacted and implemented, it said, adding that the government needs to control its expenditure on petroleum subsidies.
Subsidies and the resultant higher fiscal deficit may help in keeping inflation suppressed in near term, but over time the impact of higher subsidy induced deficit would exert pressure on the inflation path.
Concerned over rupee depreciation and widening current account deficit, the Reserve Bank today underlined the need for policy reforms to improve investment climate.
"Going forward, there is need to reduce dependence on debt flows by encouraging renewed equity flows through acceleration of policy reforms aimed at improving the investment climate," RBI said in its Macro-economic and Monetary Developments Review.
It said that the composition of capital inflows has shifted towards debt, and financing of Current Account Deficit (CAD) has resulted into exchange rate pressure. "With a widening CAD, larger fiscal spending could affect growth and stability in the economy," RBI said.