Mumbai:  Striking a hawkish tone, RBI on Thursday said the scope for reducing interest rate is limited in view of high retail inflation and current account deficit (CAD) even as India Inc clamours for rate cut to boost growth.

The Reserve Bank, which will on Friday announce monetary policy for 2013-14, has also made a case for improved governance and removing structural bottlenecks. "While demand-side inflation pressures reduced, high consumer price inflation along with the CAD well above sustainable levels limit the space for monetary policy to support growth," RBI said.

The Central Bank's Macroeconomic and Monetary Developments report said that even while macro-financial stability risks have started getting addressed, they remain significant at current juncture. "This necessitates careful calibration of monetary policy during 2013-14," RBI said.

It said the impact of monetary policy in boosting GDP growth is contingent upon resolution of supply bottlenecks, governance issues impeding investments and the government's efforts towards fiscal consolidation. "Growth continued to slow down in 2012-13, but could witness a slow-paced recovery later this year, contingent on improved governance and concerted action to resolve structural bottlenecks," RBI said.

It further said a revival in growth in the current fiscal is likely, but the recovery would be modest against the backdrop of stagnating industrial output. Noting that the recent fall in the prices of gold and crude give a "much needed relief", it said being complacent on a temporary phenomenon would be "myopic".

RBI reduced key interest rate by 1 per cent during 2012-13 and pressure is mounting on it to further cut rates in the annual policy to boost growth, which fell to a decade's low of 5 percent in the last fiscal.

A survey of professional forecasters sponsored by RBI expects the growth to improve to 6 per cent in 2013-14, and the average headline inflation to moderate to 6.5 percent.

On inflation, the report said the trend of downward spiral will continue through first half, while suppressed inflation in form of upward revision in energy prices and a base effect will lead to an increase in the second half.

The nearly 20 percent fall in commodity prices, and inflation at a 3 year low of 5.96 percent in March, has led to expectations among the industry of cut in key policy rates.

RBI conceded that its policy rates have been one of the reasons for the growth to dip, but maintained that a rate cut alone will not drive up the growth. "Recovery at the current juncture will critically depend on supply-side action to remove a host of micro-constraints and structural bottlenecks that impede production and investment, especially in growth driving sectors such as road and power," RBI said.

The Central Bank also called for a public investment stimulus "balanced with offsetting reductions" in expenditures, along with removing the supply side bottlenecks, to revive the economy.

The report also said that if the government continues with its recent efforts of curbing expenditure in order to meet the fiscal consolidation target, it is likely to reduce pressure on the CAD. The CAD/GDP ratio rose to a record 6.7 percent in third quarter of 2012-13. RBI said that notwithstanding likely improvement in last quarter, the CAD/GDP ratio is expected to be at a new high of around 5 percent for the year 2012-13, which is about twice the sustainable level.


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