RBI lauds govt’s reform push

Hopeful business sentiment will improve, but says more steps required

The Reserve Bank of India (RBI) is clearly not ready yet to deliver the first policy rate cut after nearly three years that is expected to cement the downward direction of the rate cycle, and boost investment and growth in the economy.

In its second quarter review of macro-economic and monetary developments report for 2012-13 released on Monday, RBI lauded the government for the slew of measures taken over the past six weeks but remained concerned over inflation.

Since September, the government has aimed to cut subsidies by raising diesel prices, allowed for greater foreign direct investment into retail, aviation, and broadcast and given a roadmap for fiscal consolidation. The central bank said that the reforms by themselves will not address growth weakness.

"Speedy implementation of the proposed measures and further progress to contain twin deficits would be needed for sustainable recovery to set in," RBI report said.

Nevertheless, RBI is optimistic the policy measures would improve business sentiment and better the outlook for industrial growth.

Its latest round of industrial outlook survey showed further weakening in sentiment during July-September quarter. In fact, its business expectation index was at levels seen during the onset of the global financial crisis in 2008, the RBI report said.

The central bank's survey showed professional forecasters have cut GDP growth rate for 2012-13 to 5.7% from 6.5% with both industry and agriculture expected to be worse than before. "While a modest recovery can be expected later in the year as the investment climate improves, growth in 2012-13 will fall short of the earlier projection," the report said.

RBI warned the country's current account imbalance has worsened. It wants the twin deficits to be contained for macro-economic stability.

"This requires staying on the path of fiscal consolidation, keeping a tab on private consumption demand and supplementing it with selective use of expenditure-switching policies to lower the CAD," RBI said.

... contd.

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