RBI report leaves little room for rate cut now- Business News
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RBI likely to maintain status quo on key rates

Inflation continues to be the top area worry for the Reserve Bank of India overriding concerns related to slowdown in economic growth, indicating that there is little likelihood of any policy rates cuts in the third quarter review of the monetary policy on Tuesday.

  • Mumbai,  January 24, 2012  
  • |  
  • UPDATED   10:54 IST

Inflation continues to be the top area worry for the Reserve Bank of India (RBI) overriding concerns related to slowdown in economic growth, indicating that there is little likelihood of any policy rates cuts in the third quarter review of the monetary policy on Tuesday.

However, in its October policy review RBI had highlighted the downside risks to economic growth as well, which was projected to be around 7.6 per cent for 2011-12.

Summing up its observations in the pre-policy report, titled 'Macroeconomic and Monetary Developments', RBI said, "Even as growth slowdown emerges as the major challenge, inflation risks persist, posing a challenge for monetary policy in achieving low and stable inflation with minimal sacrifice of growth."

After hiking the policy rates for 13 times in 20 months since March, 2010, in its war against inflation, RBI has paused the rate hike cycle only in mid-quarter review in December, 2011. Economists expect the RBI not to slash policy rates - repo or reverse repo - on Tuesday.

Inflation has shown some moderation as anticipated though upside risks continue to remain as a result of incomplete pass-through of rupee depreciation, suppressed inflation in the energy segment and expansionary fiscal policy. "Even though food inflation has been pushed into negative territory, inflation in protein-rich items persist in double digits. Therefore, once the seasonal moderation ends and base effect wanes, food inflation could revert course significantly," RBI added.

The pause in the tightening of the monetary policy and further moderation in inflation should help industrial activity regain some momentum. Higher IIP growth in November, 2011 and the rise in manufacturing and services PMI for December 2011 already indicate some improvement. IT IS possible to raise growth from the current levels but restoration of business confidence is the key … However, on balance the downside risks to real GDP growth during 2011-12 have increased," RBI said, leaving scope for a possible reduction in growth projection for the current fiscal, from 7.6 per cent earlier.

The latest round of Industrial Outlook Survey conducted by RBI also did not bring any cheer on the business confidence front. The survey conducted during the October-December quarter showed marginal increase in business confidence for the reviewed quarter, but a marginal decline was recorded in expectation for the January-April, 2012 quarter.

RBI has also emphasised the need for structural measures to address the bottlenecks, which is one of the major reasons for high inflation, and bring the Centre's fiscal conditions in order for saving the country from the current challenges.

"While in the short run, moderating inflation will provide some space for monetary policy to address growth concerns, in the absence of structural measures to address supply bottlenecks, this will be at best, a temporary respite. In addition, the expansionary fiscal stance has emerged as an upside risk to inflation," RBI said.

Courtesy: Mail Today