Reserve Bank declines to drop guard on inflation

Last Updated: Sat, May 04, 2013 05:36 hrs

The Reserve Bank of India (RBI) has declined to drop the guard on inflation and continued its anti-inflationary stance in the annual monetary policy 2013-14. The Street had expected the central bank to shift the stance to pro-growth in a situation where the gross domestic product (GDP) in the third quarter ended December 31 was the weakest in the last 15 quarters.

To boost growth, the central bank has put the ball in the government's court.

"Recent monetary policy action, by itself, cannot revive growth. It needs to be supplemented by efforts towards easing the supply bottlenecks, improving governance and stepping up public investment, alongside continuing commitment to fiscal consolidation," said the monetary policy statement on Friday. RBI guidance is also hawkish. The central bank said "the balance of risks stemming from RBI's assessment of the growth-inflation dynamic yields little space for further monetary easing."

As the Street had expected the stance to shift to pro-growth, there were expectations of repo rate cuts in the range of 75-100 basis points for the current financial year.

"Market expectations of more than three policy cuts over the next 12 months would likely be tempered in our view, given the RBI's guidance," said Tushar Poddar, managing director and chief India economist, Goldman Sachs. GDP growth in the third quarter of 2012-13 was at 4.5 per cent, compared with 5.3 per cent in the previous quarter and six per cent in the third quarter of 2011-12. According to Radhika Rao, economist, DBS Bank, we may see another 25 basis points cut in the repo rate within the first half of the current financial year, and some sacrifice by way of slower growth seems inevitable.

After the cut of 25 basis points on Friday, the repo rate is now at 7.25 per cent.

Economists are of the view that RBI's balancing act between growth and inflation has got tougher.

"The RBI's balancing act has only got tougher in the last few years, as GDP growth has fallen below potential but inflation has remained stubbornly high. I believe that the room for aggressive rate cuts will remain limited until inflation comes down to around five per cent on a sustainable basis.

If this is to be achieved, the RBI cannot play a lone hand and will require, among other things, the support of a restrictive fiscal policy and removal of supply-side bottlenecks," said D K Joshi, chief economist, CRISIL.

The hawkish tone by the central bank resulted in bond yield rising. The yield on the 10-year benchmark bond 8.15 per cent 2022 ended at 7.74 per cent on Friday compared with the previous close of 7.72 per cent. During intra-day trades the yield touched a high of 7.81 per cent.

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