RBI lowers growth forecast to 6.5%

Sees Upside Risks To Inflation, Dashes Rate Cut Hopes In Today's Review Mumbai: A day before it reviews interest rates in its monetary policy review, the Reserve Bank of India (RBI) has kept the market guessing by publishing a sharply lower growth forecast of 6.5% for 2012-13. At the same time, RBI has said that the near-term outlook on inflation continues to be marked by a number of upside risks, despite the significant slowdown in growth.      Lower growth forecasts typically increase hopes of a rate cut. However, RBI has queered the pitch by stating that persistent inflation limits the space for monetary policy to revive growth.      In its report on macroeconomic and monetary developments, which is published on the eve of the monetary policy, RBI has reported the findings of its poll among professional forecasters on the economy. According to the poll, India's GDP growth rate forecast for 2012-13 has been lowered to 6.5% from the earlier 7.2% on the back of a weak monsoon and high inflation.      Economists, bankers and traders expect RBI to hold interest rates when it announces its monetary policy review on Tuesday. However, public sector banks, which control nearly 70% of banking activity, have made a strong pitch for easing liquidity through a reduction in cash reserve ratio (CRR).      While banks have argued on the need for lower rates for Indian business to be more competitive, RBI has rebutted this in its report stating that real interest rates (nominal interest rates adjusted for inflation) today are much lower than they were in the pre-crisis period. The central bank has attributed the investment slowdown to factors other than interest rates. RBI has also put the onus of reviving growth on the government. "The economy is now at a critical juncture where revival can be supported by restoring confidence through policy actions to encourage investment. Removing constraints on FDI and improving the investment climate by moving quickly to address bottlenecks in infrastructure space are important," RBI said in its report.      Earlier, RBI had taken the stance that the centre does not have the headroom for a fiscal stimulus. Now, the macro report states that speeding up fiscal consolidation by putting in place an investment stimulus through large capital spending by the government — but offsetting it by curtailing revenue spending by revamping the subsidy schemes — could go a long way in reviving growth.      Commenting on the international situation, RBI said that global financial market stress resurfaced due to the deepening crisis in the euro area, especially in Greece and Spain, with the Libor fixing scandal adding to the uncertainty. The central bank has pointed out that the deceleration in growth in the BRICS nations, which have so far been drivers of emerging market growth, has added a new dimension to the global slowdown, making near-term recovery difficult.      In a different context, the central bank has also asked corporates to focus on their business rather than bet on currency movements and to use derivatives carefully and only for the purpose of hedging. Speaking at the iForex Leaders Summit in Mumbai on July 28, RBI executive director G Padmanabhan said, "We expect greater responsibility on the part of corporates in managing their risks, which calls for greater understanding of their actions from a macro perspective."  PRICE PAIN tRBI says space for monetary policy to revive growth limited by high inflation  tMaintains current real interest rates (nominal interest adjusted for inflation) much lower than pre-crisis period  tRBI sees factors other than interest rates for investment slowdown, puts onus of reviving growth on govt  tAsks corporates to focus on business rather than bet on currencies, use derivatives only for hedging