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Will the RBI budge ?

, June 13, 2013, 0 Comments

Recent days have seen publication of a lot of macro data which doesn’t lead us to optimism. The Central Statistical Organization came with an estimate of GDP growth for fiscal 2013 of 5 percent which was the lowest in a decade. Our Finance Minister has been expecting a pick-up in economic growth rates to about 8 per cent in the medium term. So the realization of a growth rate of 5 percent for the last year came as a disappointment.

The IIP figures released on 12 June 2013 also came as a disappointment. The IIP growth figures for April came at 2 percent. The growth figures for capital goods and consumer durables also turned out to be disappointing indicating that there is not much hope for improvement in the near future.

Inflation has in recent days shown a declining trend. But CPI data released on 12th June doesn’t present an optimistic picture. While there was expectation of considerable decline in inflation the data did not reflect any such optimism. The May CPI figures stood at 9.31 percent and this gives no ground for optimism.

One optimistic indication is provided by the fiscal deficit data. The government has been able to contain the fiscal deficit for 2012-13 as promised. The estimate for the full year turns out to be 4.9 percent which is below the projected figure. The Finance Minister has promised to contain fiscal deficit at 4.8 percent during the current year.

A new development that has once again become a headache to the government was the abrupt decline in the exchange rate for the Indian Rupee. While on the 11th of this month the Rupee Dollar exchange rate almost touched the 59 level mark interventions have improved the situation a little. However, even now the possibility of the exchange rate touching the 60 level mark haunts the government. The record Current Account Deficit achieved during the last financial year is a matter of grave concern and is at the root of the falling Rupee. The FIIs have also been liquidating bonds in significant quantities.

Gold imports have been another factor that has given sleepless nights to Finance Ministry officials and the RBI. Several measures have been taken to curb gold imports, including increasing import duty on gold to 8 percent. These measures appear to be paying dividends and there is indication that import of gold is showing a declining trend. High levels of gold imports have been a major factor contributing to the ballooning of the Current Account Deficit.

Large scale import of crude oil has been another factor contributing to the widening of the CAD. The freedom given to oil companies to increase petrol price to compensate for variation in international prices and the decision to increase diesel prices by 45-50 paise per month have helped regulate crude oil imports to a certain extent. More needs to be done on this front. Ultimately one would like to see diesel imports freed from the clutches of administered pricing as is now the case with petrol.

While a declining trend in inflation had raised hopes for further quantitative easing by the Reserve Bank of India, the recent abrupt fall in the exchange rate of the Rupee has countered this favorable development. A high interest rate regime, being favorable to attracting inflow of foreign funds, it will be difficult for the Reserve Bank to signal a reduction in interest rates at a time when the Rupee needs support.

The most recently available inflation data also does not indicate that fall in rate of inflation is gathering momentum. Under these circumstances it would not be prudent to expect RBI to reduce the repeat rate in the forthcoming policy review.