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RBI lists four threats to stability

Mumbai, Dec. 28: India’s financial stability remains potentially at risk on falling growth, persistent elevated level of inflation and high twin deficits, the Reserve Bank today said in a report.

“Lower growth, elevated inflation, high fiscal and current account deficits remain potential risks to financial stability,” the RBI said in its Financial Stability Report.

Yesterday, finance minister P. Chidambaram had said it was imperative to contain the fiscal deficit by augmenting resources and controlling expenditure. Fiscal deficit occurs when the government’s total expenditure exceeds revenue.

For 2012-13, the fiscal deficit has been revised upwards to 5.3 per cent from 5.1 per cent.

The current account deficit (CAD) in 2011-12 was 4.2 per cent and the government expects to bring it down to below 4 per cent this fiscal.

CAD occurs when total import of goods, services and transfers is greater than the total export.

Amid the global slowdown and uncertainty, the Indian economy remains sluggish, held down by slowing investment, weakening consumption and declining exports, the RBI said.

“The loss of growth momentum, which started in 2011-12, extended in the current year with growth remaining below the trend, however, inflation continued to remain above the RBI’s comfort zone.        

“On the external front, CAD remains above the comfort level and the Indian rupee witnessed depreciation pressure,” the RBI said.

Inflation, based on wholesale price index, fell to 7.24 per cent in November from 9.46 per cent in the same month a year ago. However, retail inflation moved up to 9.90 per cent from 9.75 per cent in October.        

The RBI said various domestic and external factors caused significant deceleration in growth in the last few quarters.

“GDP growth remained low at 5.3 per cent during the second quarter of 2012. On the domestic front, structural impediments such as a fall in domestic savings, persistently high inflation, regulatory and environmental issues resulting in a fall in investment demand and moderation in consumption spending have contributed to the fall in growth,” it said. The apex bank has lowered this fiscal’s growth projection to 5.8 per cent from 6.5 per cent.

On external sector vulnerabilities, the RBI said the slowdown in global growth had reduced demand for Indian exports. On the other hand, imports have tended to slow to a lesser extent as the major portion is relatively inelastic (oil imports), it added.        

“This could exacerbate CAD. In the face of general risk aversion, financing the CAD has become a challenge. The benefit of a depreciating currency has been muted because of weak external demand, which could worsen on materialisation of US fiscal cliff,” it said.

 
 
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