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RBI memo lacks relief cue

Mumbai, Jan. 28: The Reserve Bank of India (RBI) today said there was limited scope for monetary easing because of the threats of inflation and the huge current account deficit and that monetary policy accommodation, if any, should continue in a calibrated manner.

These comments came in its Macroeconomic and Monetary Policy developments: Third Quarter Review 2012-13, a quarterly document that precedes its monetary policy and it disappointed those who were looking forward to the apex bank easing interest rates tomorrow.

Economists said that at best the RBI would now cut the repo rate by 25 basis points tomorrow. It is also felt that the central bank will follow it up with a cautious approach for the rest of the year.

At a time analysts were drawing comfort from headline inflation falling to a three-year low, the Reserve Bank said though inflation was likely to moderate below its March-end projection of 7.5 per cent, there was a danger of suppressed inflation.

“While the pressure from generalised inflation remains muted at the current juncture, risks from suppressed inflation, pressure on food prices and high inflation expectations getting entrenched into the wage-price spiral need to be reckoned with,” it said, adding that the inflation path for 2013-14 could face downward rigidity as some of the risks from suppressed inflation materialise.

The RBI went on to add that the current account deficit (CAD), which widened to a record 5.4 per cent of the country’s gross domestic product (GDP) in the September quarter, has become a major constraint to easing the monetary policy.

Economists said the fear of the RBI was that an interest rate relaxation could lead to higher imports, thereby worsening CAD.

On current account deficit, the report said while strong capital flows had so far enabled financing of CAD without significant drawdown of foreign exchange reserves, there is a possibility of volatility in these flows. Such an event could put further pressure on the external sector. It, therefore, called for following a two-pronged approach — of lowering CAD in the medium term, while ensuring prudent financing of the deficit in the interim.

Besides, policy-makers should continue with calibrated steps while kickstarting growth. “Monetary policy needs to continue to be calibrated in addressing growth risks as inflation remains above the Reserve Bank’s comfort level and macroeconomic risks from twin deficits persist,’’ it added.

Reacting to the observations of the RBI, Madan Sabnavis, chief economist at CARE Ratings, said it showed that the central bank was conservative about growth prospects and still pessimistic on inflation.

Giving a bearish growth forecast for the current fiscal, the report said growth in 2012-13 was likely to fall below the Reserve Bank’s baseline projection of 5.8 per cent. Further, the Professional Forecasters Survey done by the RBI envisaged slower growth in 2012-13. They revised their median growth projection downwards to 5.5 per cent from 5.7 per cent earlier.

The Reserve Bank also asked the government to carry forward recent measures it had taken as it felt that key constraints continue to obstruct investments in road and power sectors. According to the central bank, the fresh round reforms that were initiated in September last year have reduced the immediate risks facing the Indian economy.

“The recent measures taken, especially in January, have further reinforced this momentum. There are signs that growth may have bottomed out, though recovery may take some more time and is likely to be paced gradually,’’ it said.

 
 
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