Apex bank sticks to old refrain

Mumbai, May 2: The Reserve Bank of India (RBI) today pulled out all the old chestnuts – inflation versus growth, the tyranny of the twin deficits, and the need for the Centre to deliver on governance promises -- to justify the continuation of its hawkish monetary policy stand ahead of Friday's review. It stuck to its old refrain: the prospect for monetary policy easing was severely constrained by inflation which, it forecast, would be range bound at current levels in 2013-14. Worse, the central bank said it saw signs of lingering, suppressed inflation within the system that would erupt when the impact of the diesel price hike and increase in coal prices and electricity tariffs rippled through the system. In its Macroeconomic and Monetary Developments in 2012-13, a quarterly report that is released on the eve of monetary policy, the central bank doused hopes of more cuts in key rates tomorrow when it said that the monetary space in this fiscal year remained "very limited". It said headline inflation continued to remain above its comfort zone (5 per cent) even as consumer price inflation stayed firm. However, its hardline talk ahead of the policy review has often belied its action. In January, it had cut both the repo rate and the cash reserve ratio (CRR) by 25 basis points each. Most bankers believe a 25 basis point cut in the repo if a foregone conclusion. There is optimism that RBI Governor Duvvuri Subbarao may choose to trim the CRR as well; many believe that a CRR cut is the only way that an interest rate cut can be transmitted through the banking system. It has also been felt that the central bank may be less rigid about its policy stand given the fall in inflation measured by the wholesale price index (WPI) to 5.96 per cent, softening of global commodity prices and the slowdown in the economy. Although the RBI's comments about limited room for monetary easing could temper some of these expectations, experts say there have been many instances in the past where the actual policy action has differed from the tone and tenor provided by the report which precedes it. In today's report, the RBI said that economic recovery in 2013-14 was likely to be slow-paced – and it called for all-round efforts to revive growth impulses that include initiatives to remove structural impediments and improve governance. It said growth in 2012-13 would probably plummet to a 10-year low at CSO's advance estimate of 5 per cent. It added that the current account to GDP ratio "is expected to be at a new high of around 5 per cent for 2012-13, which is about twice the sustainable level". The RBI lobbed the ball at the government by saying that it could lay the foundation for a sustainable recovery if it "stays on its fiscal plans in 2013-14 and rebalances spending from non-plan to planned expenditure." It went on to add that the biggest risk to recovery came from the failure to effectively complete policy action to remove supply-side constraints that impede investments. The central bank said the growth slowdown and the lagged impact of past monetary policy actions would keep inflation moderate from the demand side. However, it noted that food inflation continued to remains a major pressure point accentuated by continuing supply bottlenecks. It called for the removal of supply bottlenecks and raising agricultural productivity in order to bring down food inflation. It added that there were other risks to inflation. While the near-term path of food inflation is also dependent on the performance of the monsoon, possible upswings in global fuel prices or depreciation of the exchange rate could pose further upside risks. http://www.telegraphindia.com/1130503/jsp/business/story_16853096.jsp#.UYPM-6KBlA0