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RBI rings alarm bell, sees below-5% growth

The Reserve Bank of India on Tuesday said that growth is expected to fall below 5 per cent in 2013-14 in absence of pick-up in manufacturing sector, but likely to recover to 5.5 per cent in the next financial year.

'Prospects of a pick-up in real GDP growth in the second half of 2013-14 have been dampened by negative growth in industrial production over two consecutive months,' the RBI said in the Macroeconomic and Monetary Developments report released along with the third quarter monetary policy review. The economic growth, it said, could be 'somewhat lower than the central estimate of 5 per cent.’

In the first half of 2013-14, the GDP growth was at 4.6 per cent. For fiscal 2014-15, there is a case for gradual recovery to the 5-6 per cent band, the RBI said, giving a central estimate of 5.5 per cent growth. The central bank further said if the nearly 130 projects worth over Rs 4 lakh crore cleared by the Cabinet Committee on Investments translate into investments, global growth improves and inflation softens, the country's GDP growth could come in at 'the higher reaches' of the forecast range of 5-6 per cent.

On the inflation front, the report said retail inflation, which stood at 9.52 per cent for December, is likely to soften further in the January-March quarter on seasonal softening in fruit and vegetable prices. For the fourth quarter, the headline CPI inflation is expected to range between 7.5 and 8.5 per cent with an upside risk, it added.  A survey of professional forecasters, polled by the central bank, said there will be a modest recovery in growth in FY15, even though inflation pressures are likely to persist. The professional forecasters' median expectations for FY14 GDP growth were at 4.8 per cent, while in FY15, they expect it to pick up to 5.6 per cent. On inflation, the forecasters estimate the CPI inflation to come in at 8.5 per cent. On the exchange rate, they expect the rupee to be at the 61 levels by December 2014. Between May and September, the RBI said the rupee had lost 17 per cent but from September to 27 January, the local unit gained 6.7 per cent.

Referring to the external sector, the report said the current account deficit, which touched an all time high of 4.8 per cent at $88 billion in FY13, will ease to 2.5 per cent this fiscal.

The RBI report also flagged concerns from the upcoming elections, saying though 'normalcy (has been) restored (recently) in the financial markets, political outcomes and commitment to reforms hold the key' for the future stability of the market and the rupee.

Rate cut wouldn’t have helped banks: Rajan

Mumbai:
RBI Governor Raghuram Rajan, who on Tuesday surprised markets with a rate hike, defended the move saying a rate cut would not have impacted either banks or borrowers and that bringing down retail prices is the key to sustainable growth.

‘If we cut policy rates, it won't have any impact on banks' cost of funds or lending rates for borrowers,’ Rajan told reporters in the customary post-policy press conference.

‘Consumer price inflation is too high, we need to bring it down... and we should be able to reach the 8 per cent objective by end of the year with this rate hike,’ he added.

Rajan said there was a need to create an environment for economic recovery to be strong and that inflation was a part of it. ‘I'm not in any way giving up on growth in coming months or quarters and that RBI is cognisant of the weak state of economy,’ he said.

The best way to sustain growth over medium term is to bring inflation down to a tolerable level during the course of the year. This will give the RBI more room to take policy action later and that will help growth, he said.

The RBI Governor said disinflationary factors must be taken into account in a weak economy, and focussing on retail inflation will ‘hasten path of disinflationary pressure.’

On the external sector threats, he said the economy is far better prepared now to face any risks, and attributed the recent rupee volatility to outflows of short term funds from the debt market.

On whether the RBI has accepted the Urjit Patel committee recommendations on inflation targeting, he said: ‘It is premature to say the RBI is moving towards inflation targeting. We've not accepted Patel committee's inflation target.

‘The central bank is studying the recommendations of the Patel panel on monetary policy and complete implementation of its report will need a dialogue with the government.’
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