The Reserve Bank of India may cut its policy rate in its third-quarter review of monetary policy to revive economic growth, it has hinted in its financial stability report. In foreword to the report, Governor D. Subbarao said, “Growth needs to accelerate if the momentum of poverty reduction, employment generation and pay-off from the demographic dividend is to be accelerated.”
GDP growth has moderated in recent quarters (at 5.3 per cent during the July-September quarter), buffeted by global headwinds and domestic policy uncertainties. In the country, structural impediments such as fall in domestic savings (particularly household financial savings), persistently high inflation, regulatory and environmental issues resulting in lower investment demand and moderation in consumption spending have contributed to lower growth. They have also increased risks to macroeconomic stability.
In addition, high current account deficit (3.9 per cent of GDP in the first quarter of 2013), stressed fiscal situation (deficit projected at 5.3 per cent), and increasing leverage and falling profitability of the corporate sector have emerged as concerns.
“All these factors seem to have brought down the potential growth rate to about 7 per cent,” the report said.
There are also early signs of leverage rising among industrial groups with large exposure to infrastructure sectors such as power.
Further, many companies have large unhedged foreign-currency-denominated borrowings overseas when exchange rates remain volatile.