RBI raises inflation estimate, rate cuts unlikely

Mumbai : A day before the monetary policy review, the Reserve Bank of India (RBI) said inflation is likely to persist, indicating it would keep interest rates on hold for the time being.

The RBI revised upward its projection for inflation based on the wholesale price index (WPI) to 7.7 percent from its earlier estimate of 7.3 percent.

At the same time, it lowered the country’s economic growth forecast for the current financial year to 5.7 percent from its earlier projection of 6.5 percent.

“The median projection for 2012-13 in the Reserve Bank’s survey of professional forecasters has been lowered to 5.7 percent from 6.5 percent for growth, while that for average WPI (wholesale price index) inflation is revised upwards to 7.7 percent from 7.3 percent,” the RBI said in its review of macro-economic and monetary developments for the July-September quarter.

The RBI said inflation was expected to moderate from the fourth quarter of the current financial year.

“While the near-term inflation risks are on the upside, inflation is expected to moderate from fourth quarter of 2012-13. However, improved supply responses and moderation of wage inflation is vital for bringing down inflation to comfort level,” it said.

In the document released ahead of the second quarter monetary policy review Tuesday, the central bank said, “As macro-risks from inflation and twin deficits recede further, that could yield space down the line for monetary policy to respond more effectively to growth concerns.”

The twin deficits refer to fiscal and current account deficits.

The RBI lauded the recent reform measures announced by the government but said swift implementation was needed to improve the situation.

“A credible fiscal consolidation strategy is now on the anvil but needs to be backed by further measures.”

Earlier in the day, Finance Minister P. Chidambaram pledged to nearly halve India’s fiscal deficit by March 2017 and said the RBI should ease monetary policy taking into consideration the recent reform measures to help economic growth.

The Indian economy has registered sluggish growth in the recent quarters. It expanded by 5.3 percent in January-March 2012 quarter and 5.5 percent in the quarter ended June, according to government data.

The lowering of growth forecast by the RBI comes a few weeks after the International Monetary Fund (IMF) sharply lowered India’s GDP growth projection, citing sluggish structural reforms and worsening global economic situation.

“Economic indicators suggest that slowdown has continued in 2012-13. However, recent policy reforms should help in arresting the downturn. They may, on their successful implementation, support recovery later,” said the RBI.

The RBI will announce the second quarter review of the monetary policy for fiscal 2012-13 Tuesday.

In the mid-quarter review of the monetary policy announced Sep 17, the central bank had lowered the cash reserve ratio (CRR) by 0.25 percent (or 25 basis points) to 4.50 percent, but kept other policy rates unchanged.

The central bank has kept the repo rate, the rate at which it lends to commercial banks, unchanged at 8 percent. The reverse repo rate, the rate at which the apex bank borrows money from commercial banks, is also kept unchanged at 7 percent.