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RBI lowers GDP projection to 5.7%, ups inflation outlook to 7.7%

The apex bank has revised the projections in its second-quarter macroeconomic and monetary developments report for 2012/13.

twitter-logoAnand Adhikari | October 30, 2012 | Updated 11:29 IST

Here comes the bad news. The economic slowdown is far more widespread than expected. The Reserve Bank of India (RBI) has drastically lowered its gross domestic product (GDP) growth projection for financial year 2012/13 from 6.5 per cent to 5.7 per cent. This is well below the expectations of six per cent.

The apex bank revised the projections in its second-quarter macroeconomic and monetary developments report for 2012/13.

Poor performances by the mining, manufacturing (stagnant output), and services sectors led to the revision. Projections for inflation, too, have been revised upwards, from 7.3 per cent to 7.7 per cent.

The good news is that the RBI expects inflation to moderate from the fourth quarter (January to March 2013).

The central bank has said that as macro risks from inflation and the twin deficits - trade and current account - recede further, it will be possible, down the line, for monetary policy to respond more effectively to growth concerns.

In other words, it could be a clear signal from the RBI that it will not tinker with interest rates at this juncture.

The RBI has also emphasised on the need for the government to ensure speedy implementation of its recent reforms, noting that that sustained reforms are important to turn the economy around.

However, the apex bank has also noted that the recent policy measures will not contain fiscal slippages in 2012/13. "Food , fertiliser and petroleum subsidies remain high and are likely to overshoot the Centre's budgeted estimates," says the RBI report.

The Union Budget has targeted a fiscal deficit of 5.1 per cent for 2012/13. It overshot the target in 2011/12 - the actual deficit was at 5.9 per cent against the target of 4.6 per cent.

There is also no respite from global markets. The risks of spillovers from global financial markets remain. "Unconventional monetary policies have transitorily moderated uncertainties, but the underlying stress has not diminished with incomplete deleveraging and unfinished financial sector reforms," says the RBI.

In addition, global growth uncertainties continue to impinge on India's export growth. Weak external demand has affected exports of engineering goods, gems and jewellery, textiles and petroleum products.

"The services trade surplus is also lower, leaving the current account deficit wide enough for a possible re-emergence of financing pressures, should global risk aversion increase or the domestic recovery falter," says the RBI.

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