Wait longer for revival, says RBI
The future for India’s economy is not so bright even though the Reserve Bank on Friday projected the growth for 2013-14 at 5.7 per cent, against the 5.5 per cent projected in January 2013. RBI governor D. Subbarao said there will be some growth “but not a dramatic revival,” as he presented the RBI’s annual credit policy for 2013-14. It’s a far cry from the government’s optimistic forecast of six per cent-plus growth. The RBI lowered its wholesale price inflation projection to a lower range — 5.5 per cent during the year — but cautioned supply side constraints could fuel inflation in the second half of the year. The RBI also warned that even this moderate growth of 5.7 per cent was under threat due to several factors, the biggest risk being the current account deficit. While it is above sustainable levels, its financing exposes the nation to risks of sudden stoppage of capital flows that today covers CAD. Capital flows are largely fuelled by the quantitative easing programmes in advanced economies, and if it stops India could see a reversal of flows, hitting macroeconomic stability. The last factor is the revival of investment, without which growth is not possible. Investment sentiment, the RBI warned, is dependent on business confidence and profitability, both of which are subdued; and will happen only if those who put in money know their projects will not be hampered by supply bottlenecks. The RBI’s message, in short, as in earlier policy statements, is that monetary policy alone will not revive growth and the government must supplement its efforts by easing supply bottlenecks, improve governance, step up public investments while working towards fiscal consolidation.
In this dire scenario, the RBI has cut the repo rate (that at which banks borrow from the RBI) a quarter per cent, from 7.50 per cent to 7.25 per cent, but said there’s little room for further easing. This doesn’t mean that personal, home and auto loans will get cheaper. Banks have said there will be no transmission of this cut, the third in recent times, while the RBI expects transmission of all cuts by way of lower interest rates to happen in the next three to six months when some growth is expected.
That is not good news for the aam aadmi as well as corporate borrowers. Dr Subbarao said the banks have a liquidity of `5 lakh crores. There must be a way this can be transmitted to areas where they are needed the most.