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Industry honchos and bankers may be in for a disappointment tomorrow. The Reserve Bank of India is likely to maintain the status quo on interest rates at its monetary policy review on Tuesday. This is because price pressures persist in the economy, given the significant suppressed inflation in domestic energy prices and rupee depreciation.
In its document on macroeconomic and monetary developments, released on the eve of the first quarter monetary policy review, the RBIwarned that the near-term inflation trajectory could remain sticky.
The RBI wants the Government to act by creating the fiscal headroom to spur investment and revive growth. Persistent inflation limits the scope for monetary policy to revive growth.
Headroom for growth
Recovery of investment is critical in reviving growth. But this depends on fiscal consolidation and improvement in the overall macroeconomic scenario, says the RBI. The capacity of investment to respond to monetary policy actions is conditional on an improvement in the non-monetary factors that have impacted investment in the current cycle. An improvement in such non-monetary factors calls for removal of bottlenecks hampering infrastructure projects and a revival of policy reforms.
Another reason why the RBI may not cut either the repo rate (the interest rate at which banks borrow funds from RBI) or the cash reserve ratio (the amount of cash banks need to park with RBI) is that current monetary and liquidity conditions are not impinging upon growth significantly.
Consumption demand
The slowdown in consumption demand is on account of the impact of persistent inflation on purchasing power. The RBI said this indicates the need to keep inflation under check to maintain consumption demand at levels consistent with the overall growth objective.
The RBI said that significantly, while there is a slack in the economy, inflation remains persistent. Growth in the April-June quarter is likely to have stayed low after dropping to a 29-quarter low in the sequentially preceding quarter.
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