RBI warns on fiscal slippages, inflation and growth risks
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RBI study hints at rate hike pause

The central bank lists a series of positive outcomes of its past monetary actions intended to tame inflation, possibly hinting at a pause in policy rate hike this time, following 12 hikes in the last 19 months.

  • Mumbai,  October 25, 2011  
  • |  
  • UPDATED   08:23 IST

The Reserve Bank of India (RBI) on Monday listed a series of positive outcomes of its past monetary actions intended to tame inflation , possibly hinting at a pause in policy rate hike this time, following 12 hikes in the last 19 months. However, the RBI warned that fiscal slippages could complicate its demand management initiatives through monetary policy.

"The baseline inflation path still remains sticky and broadly unchanged from earlier projections. On the other hand, growth risks have increased on account of global headwinds and domestic factors. On current assessment, growth in 2011-12 is likely to moderate slightly from that projected earlier," said RBI in its report on Macroeconomic and Monetary Developments, on the eve of the midterm review of monetary policy on Tuesday.

SPECIAL: Will RBI tone down its tight monetary policy?

The Professional Forecasters Survey of RBI found that the country's top economists have slashed the projected economic growth during the current fiscal to 7.6 per cent in the recent round of survey compared to 7.9 per cent earlier. This aids RBI's efforts to tame inflation by moderating demand.

POTHOLES ON GROWTH ROAD

  • RBI's Professional Forecasters Survey says economists have slashed projected economic growth to 7.6% from 7.9%
  • This aids RBI's efforts to tame inflation by curbing demand
  • RBI expects inflation to start moderating in a few months
  • RBI also said falling investment demand, slowdown in construction activity, dip in planned corporate fixed investment and softening of pvt consumption are leading to low profitability
In the June quarter, the economy grew by just 7.7 per cent, the weakest pace in six quarters. However, inflation as measured by the wholesale price index (WPI) continued to remain high at 9.7 per cent in September despite aggressive monetary tightening by the RBI - which hiked the repo rate (at which it offers advances to banks) by 3.5 per cent in 12 tranches. RBI expects inflation to start moderating in a couple of months.

"Growth in 2011-12 is likely to moderate to below-trend. Agriculture prospects remain encouraging with the likelihood of a record Kharif crop. However, moderation is visible in industrial activity and some services," RBI said. It has also highlighted falling investment demand, slowdown in construction activity, decline in planned corporate fixed investment and softening of private consumption, leading to low profitability. Most of these outcomes are arising from the tight monetary policy stance taken by the RBI.

Planned corporate fixed investment in new projects declined significantly since the second half of 2010-11 and has stayed low in Q1 of 2011-12. "Consequently, the pipeline of investment is likely to shrink, putting growth in 2012-13 at risk," RBI added.

Indranil Pan, chief economist of Kotak Mahindra Bank, said in a preview to the monetary policy a couple of days back, "We believe that the time has come for the RBI to enter a 'wait-and-watch' mode. While lead indicators are pointing towards a distinct slowing of the economic momentum, we think the inflation has also peaked off and should decline steadily with time."

"Despite continuing high inflation, further rate hikes are not necessary as the full impact of the past rate hikes are still to percolate through to the economy," Pan added.

Even the money market reacted with an air of expectation of a 'pause'. In the government securities (G-Secs) market, bonds reversed early losses to close higher in volatile trade on Monday. The benchmark 7.80 per cent 2021 bond rose to Rs 93.57 from Rs 93.54 at Friday's close, and up from an intraday low of Rs 93.31.

The price of G-Secs has an inverse relationship with their yields. As such yields of bonds fell slightly on Monday. While stating that inflation would still remain an important factor in its policy setting, RBI, however, said, "Monetary policy trajectory will need to be guided by the emerging growth-inflation dynamics, factoring in the transmission of past actions that are still unfolding." This is in contrast to the stark inflation bias it had shown in the recent past.

Courtesy: Mail Today