Lower inflation and fiscal consolidation needed for monetary easing: RBI

Mumbai/New Delhi, Jan 28: The Reserve Bank of India Monday said inflation remains above the comfort zone and fiscal and current account deficits are still high, moderating expectations of an interest rate cut.

“Monetary policy needs to continue to be calibrated in addressing growth risks as inflation remains above the Reserve Bank’s comfort level and macro economic risks from twin deficits persists,” the central bank said in its quarterly report on the economy a day before the credit and monetary policy review.

The RBI said the although steps taken by the government to bring down the fiscal deficit to the 5.3 percent of the gross domestic product target had cut near term risks, further reductions in subsidies were needed for sustainable fiscal consolidation.

“Fiscal risks have somewhat moderated in 2012/13, but a sustained commitment to fiscal consolidation is needed to generate monetary space,” it said.

The RBI last cut rates in April 2012 by 50 basis points.

It said headline inflation moderated in third quarter with significant moderation core inflation, but consumer price index inflation edged up to double digit.

“Going forward, risks remain for suppressed inflation, pressure on food prices and high inflation expectations getting entrenched into the wage price spiral. The inflation path for 2013-14 could face downward rigidity.”

While stressing the need for calibrated measures in managing the country’s monetary policy, the RBI lowered growth forecast to 5.5 percent in 2012-13.

“Growth in 2012-13 may fall below the Reserve Bank’s October 2012 projection of 5.8 per cent. Even though a modest recovery may set in from Q4 of 2012-13 as reforms and efforts to remove structural constraints get underway, sustaining this recovery through 2013-14 would require all-round efforts in removing impediments for business activity,” it said.

The central bank, which has maintained a tight monetary policy in view of the fiscal deficit and high inflation rates, in last month’s guidance had said there was a “reasonable likelihood” of policy easing in the January-March quarter.

And there was wide expectation of an interest rate cut in Tuesday’s review of credit and monetary policy for the financial year 2012-13 as data and government policies converged to build a reasonable case for that after the government partially deregulated the price of diesel and limited the number of subsidised cooking gas cylinders per household per year and inflation moderated.

Finance Minister P. Chidambaram has said the budget deficit would be contained in the current fiscal to 5.3 percent of Gross Domestic Product (GDP).

The headline inflation is still above the RBI’s comfort level but it has begun showing signs of easing. As measured by the wholesale price index, it fell to a three-year low of 7.18 percent in December.

And core inflation (headline inflation minus food and energy inflation which have a more direct impact on monetary policy action) has been falling. In December, it had reached a 33-month low of 4.24 percent.

Another factor that may influence the RBI decision is the industrial production data, which had logged a negative 0.1 percent growth year-on-year in November 2012.

Despite the high hopes, there was cautious trade at the bourses. The BSE Sensex ended 0.18 points down at 20,103.35 points and the NSE Nifty closed 0.15 points up at 6,074.80. While interest-sensitive realty and auto scrips were up by over one per cent on the rate cut hope, oil and gas and consumer durables stocks fell over 0.9 per cent.

– Indo-Asian News Service

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IANS