RBI surprises with hawkish tone
A day before the Reserve Bank of India's annual monetary policy, governor D Subbarao kept everyone guessing on a rate cut with his extremely hawkish observations that not only scope for rate cut was limited, there was even a possibility that RBI may hike rates this year. Subbarao's hawkish observations come at a time when there is near unanimity among bankers, corporate and economists that the central bank would cut its repo rate by 25 basis points. The observations also mark a change in style for Subbarao whose tenure has been marked by consistent 'baby-step' measures following a predicated trend. In its report on Macroeconomic and Monetary Developments in 2012-13, RBI's survey has forecast modest recovery with growth in 2013-14 at 6% from 5% and average wholesale price inflation to moderate to 6.5% from 7.3%. Surveys show that inflation expectations have moderated slightly, while business expectations remain subdued. The macro numbers that are forecast in RBI's report are derived from a poll of forecasters outside the central bank. Both the latest growth and inflation projections are a downward revision of half a percentage from the earlier round. Forecasters expect the current account deficit (CAD) to come down to 4.5% of GDP in 2013-14 from a projected 5.1% for 2012-13. "However, given that CAD risks are still large, monetary stimulus from a consumption viewpoint needs to be restrained for some time to allow the trade account to adjust," RBI warned. The central bank also hinted that it may wait to see the outcome of monsoons before it eases policy. "Second, the risk of a sub-normal monsoon to growth and inflation cannot be ignored altogether for 2013-14 despite forecast of a normal monsoon," RBI said. But even as it sounded hawkish about prices, the central bank highlighted risks of a slowdown. "On the domestic front, the services sector activity decelerated. The sector has been the mainstay of India's recent growth story. Industrial growth is now virtually facing stagnation resulting from a combination of factors, most notably the investment cycle downturn, supply-side bottlenecks, governance problems and weak external demand," RBI said. Slowing private consumption demand is also dragging down growth, especially in the recent quarters, it said.
