RBI calls for cut in CAD

The controversial liquidity tightening measures of the Reserve Bank of India to curb the volatility in the rupee “will only provide breathing time,” says the ‘ Macroeconomic and Monetary Developments First Quarter Review 2013- 14’, adding that the RBI strategy will succeed only if it is reinforced by structural reforms to reduce the current account deficit ( CAD) and step up savings and investment. This could mean that the measures which were thought to be temporary may not go away in a hurry as industry expects. Commenting on the measures taken by the RBI to tighten liquidity the review said going forward the RBI would endeavour to actively manage liquidity to reinforce monetary transmission that is consistent with the growth- inflation balance and macro- financial stability.

The RBI had cut policy rates by 1.25 per cent in 2012- 13 and early May 2013 and average lending rates had gone down by 47 basis points. On the inflation front the review noted that headline inflation moderated but upside risks persist.

While WPI inflation had fallen, food inflation remained high and CPI inflation hovered around double- digit levels putting pressure on the general price level. The document released by the RBI on Monday ahead of Tuesday’s Credit Policy announcement said the economy would remain sluggish and pick up only in latter part of 2013- 14 with the help of a good monsoon that could shore up rural demand.

On the industry front the review noted that bottlenecks are constraining core industries while the service sector could see moderation in the first quarter of 2013- 14. It said though government has taken initiatives in addressing infrastructure bottlenecks “the progress is slow.” Nearly half the 566 large central sector projects are delayed and have cost overruns of about 18 per cent. Investment in new projects improved in the last quarter of 2012- 13 and sales decelerated to 4.9 per cent in Q4 of 2012- 13 from 9.4 per cent in Q3.

The review also noted the deterioration in the vulnerability indicators in the economy.