Prune deficit, give space for monetary action: RBI to govt

The Reserve Bank of India on Thursday asked the government to cut subsidies and "provide some space for monetary policy" but also maintained that "lower interest rates alone are unlikely to jumpstart the investment cycle".

Retaining its hawkish monetary policy stance, the RBI said food inflation pressures have "re-emerged and are likely to be exacerbated by drought conditions" following the unsatisfactory monsoon so far.

"Since the April 2012 policy, the growth outlook has turned weaker, while the inflation path moved slightly higher. While core inflationary pressures remained low, they have not fallen commensurate to the growth slowdown. Consequently, monetary policy will need to be carefully calibrated to the evolving growth-inflation dynamics," the RBI said in its Annual Report 2011-12.

The RBI has made it clear that action on the fiscal front is needed for changes in the monetary policy. "With limited fiscal and monetary space available to provide a direct stimulus to domestic growth, an expenditure switching policy is needed that reduces government's revenue spending by cutting subsidies and using the resources so released to step up public capital expenditures. Such an action would also provide some space for monetary policy, but, importantly, lower interest rates alone are unlikely to jumpstart the investment cycle," it said.

Calling for steps to boost industrial growth, the RBI said, "Fast-tracking of infrastructure projects and pending regulatory clearances will help to boost investments… a lot more needs to be done to boost the performance of core industries and lead revival of industrial growth."

Growth in India has decelerated through successive quarters of 2011-12, dropping from 9.2 per cent in Q4 of 2010-11 to 5.3 per cent in Q4 of 2011-12. This drop did prompt the RBI to shift its policy stance by first pausing and then front-loading the cut in the repo rate by 50 bps in April 2012, it said.

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