CRISIL has released a report on RBI’s July Monetary policy review. The RBI has maintained status-quo on interest rates as inflation concerns continue to dominate. The report analyses the impact of this policy on the Indian economy.
Download the full report at the link below :
The Reserve Bank of India (RBI), in its monetary policy review on July 31st, has kept the repo rate unchanged at 8 per cent. The central bank raised its March 2013 Wholesale Price Index (WPI) inflation forecast to 7 per cent from 6.5 per cent projected in April 2012. Pressures on inflation have emerged on account of a deficient monsoon, an impending upward revision in domestic fuel prices and a weak rupee. The GDP growth forecast for 2012-13 has been cut to 6.5 per cent from 7.3 per cent projected earlier. The RBI’s decision to keep policy rates unchanged despite lower growth was the right thing to do given the risks to inflation and limited upside to growth even if interest rates were lowered.
Though growth prospects have weakened, lower interest rates cannot, in isolation, propel growth unless fiscal policy turns supportive. According to CRISIL Research’s recent survey, over 70 per cent of the respondents cited policy logjam (rather than high interest rate environment) as the major reason for the investment slowdown. The survey suggests a 35 per cent decline in private sector (nominal) capital expenditure in 2012-13.
In view of rising risks from a deficient monsoon and a worsening of the Euro zone growth prospects, CRISIL Research’s forecast of 6.5 per cent for India’s growth in 2012-13 is currently under revision. The likelihood of the GDP growth forecast falling below 6 per cent is high. Any impact on agricultural production due to a deficient monsoon would also reflect in the upward revision of our current average WPI inflation forecast of 7 per cent for 2012-13.