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Mumbai, Oct. 29: Inflation remains a worry and the twin deficits — fiscal and current account — are huge concerns. So, even if growth has continued to slow in the July-September quarter, the Reserve Bank of India is in no mood just yet to recalibrate its monetary policy and jump-start a faltering economy.
A day before its second-quarter review of the monetary policy, the RBI held out very little hope for the rate cut that industry has been clamouring for.
“Inflation risks persist, warranting a cautious policy calibration,” the RBI said in its report on macro-economic and monetary developments ahead of Tuesday’s policy review. The repo — the key policy rate — has been pegged at 8 per cent for over six months since the sudden and sharp 50 basis point cut on April 17.
The central bank said inflation, which is running at around 7.5 per cent, would remain sticky in the next few months but should start moderating from the fourth quarter of 2012-13 (January-March). It said that with global inflation likely to remain benign, domestic inflation could soften further in the first half of 2013-14.
The report said all the economic indicators suggested that the slowdown continued in the second quarter with slack industrial activity and sub-par services sector performance. It noted that savings and investment rates had also declined in recent years, pushing the economy’s potential growth rate down to about 7 per cent.
The burst of reforms since mid-September could arrest the downturn but much would depend on how speedily some of the measures were implemented.
It once again trotted out concerns over the fiscal and current account deficits.
“Fiscal slippage is likely in 2012-13 reinforcing the need for further measures for fiscal consolidation to crowd-in private investment,” the report added.
It said external sector risks remained in spite of the improved balance of payments during the first quarter of this year. Merchandise deficit in 2012-13 has been lower, but it still reflects the contraction in import demand on the back of growth deceleration. The services trade surplus is lower, leaving the current account deficit (CAD) wide enough for the re-emergence of financing pressures.
It, however, admitted that the recent measures, including those to augment foreign direct investment, should help in CAD financing. The bank has favoured dependence on stable, long-term fund inflows to finance CAD rather than the hot money that sweeps in and out of countries driven by market returns and investor whim.
The report said: “There is a need to calibrate monetary policy factoring in the growth-inflation dynamics as also the progress that may be made in containing the twin deficits.”
The RBI was, however, very clear that it wouldn’t steer monetary policy to ratchet up growth unless the demons of inflation and deficits were slain. “If macro-risks from inflation and twin deficits recede further, that could yield space down the line for monetary policy to respond to growth concerns,” the RBI said.
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