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RBI cites difficulties in monetary easing; high inflation, CAD weighs

29 Jan 2013 Evaluate

Citing high inflation and widening current account deficit as big constraints to monetary easing, the Reserve Bank of India (RBI) on January, 28 spoke about the difficulties in effecting an interest rate cut. In its report on macroeconomic and monetary developments issued on the eve of policy, the RBI said ‘given the preponderance of non-monetary factors behind the current slowdown in an environment where risks from high inflation, current account and fiscal deficits still remain, the scope for supportive monetary policy action is constrained’.

The RBI's pre-policy review statements comes at a time when the government and the industry are urging the central bank for interest rate cut to boost sagging growth. The professional forecaster sponsored by the RBI has lowered the growth projection for the current fiscal to 5.5% from 5.6% projected earlier. They have also cut the growth forecast for the next financial year to 6.5% from 6.6%.

Regarding inflation, RBI said that it is likely to moderate below its projection of 7.5% by March-end. However, it added, ‘suppressed inflation continues to pose a significant risk to the inflation in 2013-14 as some of the risks materialize, inflation path may turn stick.’

Referring to recent reforms initiatives, RBI stated that business sentiments remain weak despite reform initiatives and consumer confidence is edging down. Further it added that reforms initiatives have reduced immediate risks, but there is a long road ahead to bring about a sustainable turnaround for the Indian economy.  

However, the central bank is expected to keep its options open when it said that when the government's recent economic reforms measures 'show up fully and definitely' it would be possible for the monetary policy to increasingly focus on revival of growth.

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