FICCI welcomes repo rate reduction; markets down.
By R Chandrasekaran
CHENNAI: The Reserve Bank of India has put back the ball in government’s court to announce measures for growth drivers as reducing the interest rates alone will not bump up the economic growth.
While reducing repo rate by 25 basis points as has been widely predicted, the central bank has not provided any surprise announcement as far as cash reserve ratio (CRR) is concerned. This apart, the central bank is projecting GDP growth much lower than the government’s estimation for the fiscal year ending March 2014 inviting criticism from the planning commission.
The RBI has in fact gave enough indication even before the annual monetary policy review meeting that easing of monetary policy will alone be not sufficient enough to stimulate growth. On Thursday, it released a survey and disclosed that the need of the hour was a cautious monetary policy since the risk factors continue to remain both at the global and domestic level. The central bank also wanted the government to do more on removing bottlenecks for infrastructure besides improving governance.
While stating that the banks have enough liquidity buffers, the RBI Governor D. Subbarao cautioned that there is very little room for further easing of monetary policy in the current fiscal year. For the year 2013, the central bank has already announced 75 basis points cut in interest rates.
The central bank believes that the risk with regard to inflation still persists though the inflation eased sharply in March. It made it clear that its aim is to see the wholesale price inflation fall to 5 percent by March next year. While the wholesale price inflation reached 5.9 percent recently, the elevated consumer price index of 10.39 still remains a concern. In short, the RBI believes that the inflation will not be within its comfort zone in the current fiscal year and sees it to be range bound. However, Finance Minister P. Chidambaram feels that the falling inflation could raise room for further rates cut.
Turning towards current account deficit, the RBI said higher current account deficit could pose serious risk ‘by far’ to the Indian economy. The belief is that if the monetary policy is tightened globally, then the inflow could dwell a blow thereby posing a danger of further deterioration of current account deficit.
On the economic growth for the current fiscal year, the central bank is not on the same page as the government. While planning commission Deputy Chairman Montek Singh Ahluwalia believes that India could still achieve 6.1 – 6.7 percent economic growth in the current fiscal year, the RBI sees modest improvement in economic activity over the last year with the pick- up expected only in the second half of the year.
Dr. Subbarao also cautioned, “Conditional upon a normal monsoon, agricultural growth could return to trend levels. The outlook for industrial activity remains subdued, with the pipeline of new investment drying up and existing projects stalled by bottlenecks and implementation gaps.” He also stressed the need for the government’s action to revive growth and interest rate cuts alone will not help revive growth.
Taking into considerations various aspects, the RBI is pegging the economy to grow at 5.7 percent for the current fiscal year. This has obviously irked Ahuluwalia to term the prediction more as pessimistic.
The central bank GDP prediction is lower than the CRISIL’s revised outlook of 6 percent compared to its earlier 6.4 percent forecast and a similar reduction in forecast from the World Bank.
Commenting on the RBI’s monetary policy, DBS’ economist Radhika Rao told a television channel, “In essence, the guidance from the central bank is that the correction in the inflation and current account position is more cyclical rather than structural. Thereby caution should be exercised on both counts and that the central bank is unlikely to embark on an aggressive easing cycle if they are not convinced that the structural constraints have been addressed. Some sacrifice by way of slower growth seems inevitable then.”
Meanwhile, welcoming the reduction in repo rates, Federation of Indian Chambers of Commerce and Industry (FICCI) president Naina Lal Kidwai said that this will give the right signal to India Inc. and it will be important to continue with this stance at least over the next quarter.
FICCI also said that it has been reiterating that kick starting investments is the key to growth drivers. The trade body commended the recent progress in giving clearances to the number of stalled projects and this momentum should be continued. The FICCI further said, “The ICOR has to be brought down to 4 from the current level of 5, to achieve a growth rate of 6.1 to 6.7 per cent in the year 2013-14, as projected by Economic Survey or even the 6 per cent growth rate as projected by RBI’s survey of professional forecasters lowered the growth forecast for the year 2013 -14 to 6 per cent.”
In response to the RBI’s comments on economy, inflation, and current account deficit, the Indian stock markets tanked approximately 0.8 percent snapping three days of winning streak. Before the central bank’s annual meeting, the BSE’s benchmark index advanced 2.33 percent in three trading sessions.
The government, which has been urging the RBI to slash rates, has got back the ball in its court for action.
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