Inflation, Widening CAD Limit Scope for Monetary Action: RBI

Mumbai: Citing high inflation and widening Current Account Deficit ( CAD) as big constraints, Reserve Bank said there is limited scope for monetary actions like interest rate cut to boost growth in the third quarter policy to be announced.

"Given the preponderance of non-monetary factors behind the current slowdown in an environment where risks from high inflation, current account and fiscal deficits still remain, the scope for supportive monetary policy action is constrained", RBI said in its report on Macroeconomic and Monetary Developments issued on the eve of policy.

The central bank, however, said that with the government executing economic reforms measures, it would be possible for the monetary policy to increasingly focus on revival of growth.

Meanwhile, the professional forecasters sponsored by the RBI has lowered the growth projection for the current fiscal to 5.5 per cent from 5.6 per cent projected earlier. They have also cut the growth forecast for the next financial year to 6.5 per cent from 6.6 per cent.

As regards inflation, RBI said it was likely to moderate below its projection of 7.5 per cent by March-end. However, it added, "suppressed inflation continues to pose a significant risk to the inflation in 2013-14. As some of the risks materialises, inflation path may turn stick."

Referring to recent reforms initiatives, it said, "(they) have reduced immediate risks, but there is a long road ahead to bring about a sustainable turnaround for the Indian economy. Business sentiments remain weak despite reform initiatives and consumer confidence is edging down."

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