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Even as it kept the policy rates unchanged, the central bank cautioned that high food inflation, particularly in respect of cereals and vegetables, could exert upside pressure on the overall inflation.
The RBI kept the repo rate (the interest rate at which banks borrow short-term funds from RBI) and the cash reserve ratio (the slice of deposits that bank have to park with RBI) unchanged at 7.25 per cent and 4 per cent, respectively.
The central bank said suppressed inflation being released through revisions in administered prices (of fuel), minimum support prices (of cereals and pulses), and recent depreciation of the rupee (imports become costly thereby stoking inflation), will the determine inflation outlook, going forward.
In its annual policy, announced last month, the RBI said WPI inflation is expected to be range-bound around 5.5 per cent during 2013-14. Further, it projected a GDP growth of 5.7 per cent.
CAD challenge
The main challenge, according to the RBI, is to reduce the current account deficit (CAD) to a sustainable level. Further, the near-term challenge is to finance CAD through stable inflows.
CAD, which touched an all-time high of 6.7 per cent of GDP in October-December, arises when a country’s total imports of goods, services and transfers are greater than exports.
A widening CAD exerts downward pressure on the rupee, making imports costly. This is a cause for concern for the Government as costly crude oil imports have inflationary impact.
While several measures have been taken to contain the CAD, the RBI said “we need to be vigilant about the global uncertainty, the rapid shift in risk perceptions and its impact on capital flows.”
The measures taken to narrow the CAD include increasing the Customs duty on gold to 8 per cent from 6 per cent and upping the foreign institutional investor (FII) limit in government securities by $5 billion to $30 billion.
The RBI said the rupee has weakened due to sell-off by FIIs, reflecting risk-off sentiment triggered by apprehensions of possible tapering off of quantitative easing by the US Fed.
Here’s a piece of advice for the Government. The RBI said the continuing weakness in manufacturing activity needs to be urgently reversed.
Key to reinvigorating growth is accelerating investment by creating a conducive environment for private investment, improving project clearance and implementation and leveraging on the catalytic effect that public investment can have on private investment.
Naina Lal Kidwai, President, FICCI, said: “Investment sentiment has to be supported constantly. FICCI’s recent Business Confidence Survey (Q4 FY13) pointed out that nearly 74 per cent of the participants reported that if the lending rates are not brought down with immediate effect it would have a serious to moderate impact on their investment plans.
“As the monetary transmission mechanism has been weak, the RBI will need to focus on the outcome of lower lending rates by banks,” said Kidwai.
Despite the 75 bps cut in repo rate so far this year, the investment sentiment hasn’t really become buoyant and apprehensions remain. The lending rates have not come down and a pick up in non-food credit is still elusive, she added.
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