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RBI stays its ground,wants more action on policy front

* Says monetary policy will reinforce positive impact of fiscal actions

Written by ENS Economic Bureau | Mumbai | Published: September 18, 2012 2:02:25 am

The Reserve Bank of India (RBI) on Monday indicated that it’s waiting for more steps from the government on the fiscal and supply-side front before it can act on the monetary policy domain.

The RBI made it clear that “mitigating the growth risks and taking the economy to a higher sustainable growth trajectory requires concerted policy action across a range of domains,a process to which last week’s government actions made a significant contribution”.

As policy actions to stimulate growth materialise,monetary policy will reinforce the positive impact of these actions while maintaining its focus on inflation management,the RBI said while unveiling the mid-quarter review.

“Only this will ensure that the economy derives the maximum benefit from the recent,and anticipated,fiscal and supply-side policy measures,” it said while cutting the cash reserve ratio (CRR) by 25 basis points.

“…the recent reform measures undertaken by the government have started to reverse sentiments. The government undertook long anticipated measures towards fiscal consolidation by reducing fuel subsidies and selling stakes in public enterprises. Further,steps taken to increase FDI should contribute to both greater capital inflows and,over the long run,higher productivity,particularly in the food supply chain,” it said.

Appreciating the last week’s moves,it said the government’s recent actions have paved the way for a more favourable growth-inflation dynamic by initiating a shift in expenditure away from consumption and towards investment.

However,the RBI said,inflation still remains a challenge.

Commenting on the RBI’s move,Aneesh Srivastava,CIO,IDBI Federal Life Insurance,said,“… we feel that fiscal policy has to take a lead. The recent hike in fuel price would lead inflation higher in near term and limits the RBI’s ability to cut rates,but over longer term it would help to bring some fiscal consolidation. Right policy action taken by the government would create more elbow room for sharper rate action by the RBI in future…”

Looking ahead,a moderation in the trade deficit combined with increased inflows in response to domestic policy developments could ease pressures on the balance of payments,the RBI said.

However,risks from global factors,in terms of both capital movements and oil prices will persist. Given these external risks,holding down the current account deficit to sustainable levels will depend on durable fiscal consolidation and,in particular,switching public expenditure from subsidies to capital outlay that crowds in private investment,thus preparing the ground for a revival of growth,it said.

Central Bank’s Assessment


Global activity has been weakening in Q3 of 2012. Merchandise trade slowed considerably with absolute contractions in major economies. Growth in major emerging and developing economies is also moderating,with China’s Q2 2012 growth slowing to its lowest rate in the past 3 years


Economic activity picked up modestly in Q1 of 2012-13 in relation to the preceding quarter; but the sluggish momentum of value added in Q1 was evident across all sectors of the economy,and particularly in industry. Lead indicators point to slack activity in Q2 as well


Money supply (M3),bank credit and deposits have moderated in relation to their indicative trajectories,reflecting the slowing down of economic activity. Liquidity conditions have remained comfortable since June. Going forward,the wedge between deposit growth and credit growth could widen on the back of the seasonal pick-up in credit demand in the second half of the year


While the trade deficit narrowed in the first five months of FY’13,the relatively large fall of exports in July-August is indicative of risks to the current account from the worsening global outlook. The moderation in FDI inflows was partly compensated by a surge in non-resident deposits & renewal of FIIs inflow

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