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RBI lowers growth forecast to 5% for 2013-14


The Reserve Bank scaled down the growth forecast for current fiscal to 5 per cent from the earlier projection of 5.5 per cent

raghuramMumbai: The Reserve Bank today scaled down the growth forecast for current fiscal to 5 per cent from the earlier projection of 5.5 per cent, citing downside risk stemming from domestic constraints.

“Headwinds to growth from domestic constraints continue to pose downside risks, and vulnerabilities to sudden shifts in the external environment remain,” RBI Governor Raghuram Rajan said in the second quarter review of monetary policy.

The RBI had projected a growth of 5.5 per cent for 2013-14 in its first quarter monetary policy on July 30.

The economy grew by 4.4 per cent in the first (April- June) quarter of current fiscal. It had expanded by 5 per cent in 2012-13 fiscal, the lowest level in a decade.

“Strengthening export growth and signs of revival in some services, along with the expected pick-up in agriculture, could support an increase in growth in the second half of 2013-14 relative to the   first half,” Rajan said.

He said the revival of large stalled projects and clearances by the Cabinet Committee on Investment (CCI) would buoy investment and overall economic activity towards the close of the year.

The RBI’s projections are in line with that of the World Bank and International Monetary Fund (IMF) which lowered the growth forecast for India earlier this month.

The World Bank slashed India’s economic growth forecast for the current financial year to 4.7 per cent from an earlier projection of 6.1 per cent. Besides, IMF projected an average growth rate of about 3.75 per cent for India in 2013-14.

Rajan said industrial activity has weakened with a contraction in consumer durables and capital goods sector, reflecting ongoing downturn in both consumption and investment demand.

With these changes, the RBI has calibrated the window between the repo rate (7.75 per cent) and MSF (8.75 per cent) to 100 basis points, as stated in the September 20 mid-quarter review.

Accordingly, the bank rate is reduced to 8.75 per cent with immediate effect. Consequently, the reverse repo rate is adjusted upward to 6.75 per cent.

This is the second lending rate hike since Rajan took over on September 4. While he has increased the lending (repo) rate by 0.50 per cent, he also brought down the MSF rate, or emergency fund borrowing window for banks, by a steeper 1.5 per cent.

Pegging retail inflation as the biggest threat on the price index front, the RBI said it would remain elevated at over 9 per cent, while wholesale inflation will edge up in the remaining quarters of the year with the pass-through effects of the rupee’s depreciation and fuel and food inflation.

Wholesale price index (WPI) inflation is ruling above the Reserve Bank’s comfort levels, it said, adding that the persistence of high consumer price index (CPI) inflation remains a concern.

“The good monsoon should have a salutary effect on food inflation, but second-round effects from already high food and fuel inflation could impart upside pressures on prices of other commodities and services,” it said.

Giving guidance, Rajan said monetary policy faces an unenviable task of anchoring inflation expectations, amid tepid growth and weak business confidence.

“It is, therefore, important to craft policy responses so that growth concerns are addressed in an environment of stable prices,” he said.

With the normalization of exceptional liquidity measures under way, incremental calibration of monetary policy will be shaped by changes in the growth-inflation balance, keeping overall macroeconomic stability in consideration, he said.

To support growth, he said, “Complementary action aimed at productivity enhancement, structural reforms and quick project implementation will be needed.”


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