Meanwhile, in its second quarter Monetary Policy Review on October 30, RBI has effected another cut in CRR, the reserve ratio, of scheduled banks by 25 basis points, from 4.5 to 4.25 per cent of their net demand and time liabilities, effective November 3, 2012. This is a growth-supportive measure and would make available another Rs. 17,500 crores to the banking system in order to overcome any prospective tightening of liquidity conditions.

The key lending (repo) rate remains at 8 per cent with the reverse repo rate at 7 per cent and MSF at 9 per cent. The Bank Rate remains unchanged at 9 per cent. The CRR reduction would enable liquidity conditions to facilitate a turnaround in credit growth to productive sectors so as to support growth, RBI said. Another expected outcome is it would reinforce the growth stimulus of the policy actions announced by the Government as inflation risks moderate.

In its latest assessment of economic trends, RBI has further revised down GDP growth in the current fiscal to 5.8 per cent from the 6.5 per cent in the first quarter review (July). For inflation, taking note of administrative and other price rises under way and the effect of rupee depreciation, the baseline projection of WPI has been raised from 7 to 7.5 per cent for March 2013.

In his Policy Review, Governor Dr Subbarao said that welcome as they are, all the policy measures and reforms announced by Government since mid-September have helped to dispel “pervasive negative sentiments”. As the measures are implemented and further reforms are initiated and structural constraints facing investment get removed, there could be some revival in investment demand going forward and the impact on growth would be felt with a lag.

The RBI analysis makes the point that subsidies remain high and are likely to overshoot budget estimates and there would likely to be fiscal slippage in spite of recent measures in 2012/13. “Fiscal consolidation and boost to investment is key to growth revival. The high fiscal deficit had impacted the macroeconomic climate and contributed to the investment downturn”.

Dr Subbarao noted that a credible fiscal consolidation strategy is now on the anvil but it would need to be backed by further measures. The Finance Minister’s statement (Oct.29) has reaffirmed commitment to fiscal consolidation which would open up space for monetary policy to restrain inflation and support growth, he said.

Overall demand conditions during 2012-13 have stayed depressed, due mainly to slack in investment, RBI review noted. While recent initiatives to address structural impediments and augment FDI, should boost the investment climate, the reform measures by themselves are not sufficient to address the macro and structural problems constraining growth and delivering the needed reduction in twin deficits.

Yet, they mark “a significant directional change”, Dr Subbarao said, adding that speedy implementation of the proposed measures and further progress to contain twin deficits would be needed for sustainable recovery to set in. By reducing the macro-financial risks, the reforms should help arrest falling growth. However, growth in Q2 of 2012-13 is unlikely to be significantly different, gradual recovery could follow later in the year.

The Survey of professional forecasters engaged by RBI has projected GDP growth at 5.7 per cent in the current fiscal and rising to 6.6 per cent in fiscal 2014, with fiscal deficits at 5.7 and 5.3 per cent of GDP respectively for these two years. The average WPI is estimated at 7.7 per cent declining to 6.7 per cent in 2013-14.

RBI said in the macro-economic review of 2012-13 (second quarter) that lowering inflation is important from consumer welfare and equity considerations as also for sustainable growth over the medium term. As risks to macro-economy from inflation and twin deficits recede further, that could yield space down the line for monetary policy to respond to growth concerns. (IPA Service)