RBI pegs 5.7 percent growth for current fiscal

New Delhi, May 4:Projecting a modest pick-up in economic activity in the coming months, Reserve Bank pegged the GDP growth rate for the current fiscal at 5.7 pc, significantly lower than the Finance Ministry's forecast of 6.1 to 6.7 pc.

"The Reserve Bank's baseline projection of GDP growth for 2013-14 is 5.7 per cent...The bank's current assessment is that activity will remain subdued during the first half of this year with a modest pick-up in the second half, subject to appropriate conditions ensuing," RBI said in its annual monetary policy review for 2013-14 on Friday.

India's economy grew by 5 percent in the last fiscal, lowest in a decade, on account of poor performance of manufacturing, agriculture and services sector.

The RBI's current fiscal year's growth estimate of 5.7 percent is much lower than the finance ministry's growth projection of 6.1-6.7 percent and Prime Minister's Economic Advisory Council's growth projection of 6.4 percent for 2013-14.

It is also lower than the World Bank's growth projection, which predicted Indian economy to grow by 6.1 percent in 2013-14 on account of robust domestic demand, strong savings and investment rate.

Not happy with RBI's growth projection, Planning Commission Deputy Chairman Montek Singh Ahluwalia had described its outlook as "pessimistic".

"Reserve Bank is clearly more pessimistic than the government is. I think that the government forecast as of now is feasible. Critically what matters is, how effective we are in restoring the momentum of investment in the large projects", the Plan panel deputy chief said.

The Reserve Bank on Friday cut the key interest rate by just 0.25 percent to 7.25 percent and kept the liquidity enhancing cash reserve requirement unchanged.

Further, the central bank said it expects inflation to hover broadly around the 5.5 percent mark in the current fiscal and will deploy "all instruments at command" to bring it down to 5 percent by March next year.

India's headline inflation in March fell to its lowest in more than three years at 5.96 percent, but the consumer price index remained elevated at 10.39 percent.

Inflation to be about 5.5 pc in FY'14: RBI

The Reserve Bank on Friday said it expects inflation to be range-bound around 5.5 percent during the current fiscal year.

"In the Reserve Bank's assessment, WPI inflation is expected to be range-bound around 5.5 per cent during 2013-14. This assessment factors in the domestic demand-supply balance, the outlook for global commodity prices and the forecast of a normal monsoon," RBI said in its annual monetary policy review for 2013-14.

Headline inflation, as measured by the wholesale price index (WPI), moderated to an average of 7.3 percent last fiscal year. The overall inflation in March fell to 5.96 percent, lowest in the last three years.

The central bank further said that it is critical to consolidate and build on the recent gains in containing inflation and it will endeavour to condition the evolution of inflation to a level of 5 percent by March 2014.

RBI Governor D Subbarao cut the key interest rate by just 0.25 percent to 7.25 percent and kept the liquidity enhancing cash reserve requirement unchanged, disappointing the industry and stock market.

RBI said there would be modest improvement in the country's economic growth to 5.7 percent in the current fiscal, as against the decade's low of 5 percent in 2013-14.

Hawkish RBI cuts interest rate by just 0.25 pc

Sticking to its cautious stance, the Reserve Bank has cut the key interest rate by just 0.25 pc to 7.25 pc and kept the liquidity enhancing cash reserve requirement unchanged, disappointing the industry and stock market.

The RBI in its annual monetary policy statement said there would be modest improvement in the country's economic growth to 5.7 percent in the current fiscal, as against the decade's low of 5 percent in 2012-13.

Justifying the limited easing, RBI Governor D Subbarao on Friday said the "monetary policy action, by itself, cannot revive growth. It needs to be supplemented by efforts towards easing the supply bottlenecks, improving governance and stepping public investment".

The BSE benchmark Sensex dropped by half a percent in the immediate aftermath of the policy announcement.

The upside risks to inflation, which cooled to a three- year low in March, "still remain significant" in the near term on suppressed inflation on the energy front, Subbarao added.

"Overall, the balance of risks stemming from the Reserve Bank's assessment of the growth-inflation dynamic yields little space for further policy easing," he said.

The decision to leave the CRR unchanged seems to have been driven by an improvement in the liquidity deficit, as the banks are now drawing around Rs 84,000 crore from the overnight window compared to Rs 1.8 lakh crore late last fiscal.

RBI expects inflation to hover broadly around the 5.5 percent mark in the current fiscal and said it will deploy "all instruments at command" to bring it down to 5 percent by March next year.

Referring to the Cobrapost sting on the country's top three private banks allegedly helping launder money, the RBI said the ongoing investigations have underlined the need for better regulatory compliance by banks.

Even though factors like lower commodity prices and narrowing fiscal deficit would help stem inflation, RBI said the "upside risks to inflation are still significant in the short term" in view of supply imbalances, correction in administrative prices of fuel and rising minimum support price for crops.

Given these factors, "monetary policy cannot afford to lower its guard against the possibility of resurgence in inflation pressures," Subbarao said.

Describing the widening current account deficit and its financing as the biggest threat to monetary policy, RBI warned that growth would slip if governance is not improved and supply constraints are not unlocked.

The central bank expects non-food credit growth to pick up marginally to 15 percent in 2013-14 from 14 percent achieved in the previous fiscal and deposit mobilisation to be flat at 14 percent.

There were a slew of measures on the regulation of banks and non-bank entities.

RBI said its probe into the Cobrapost sting allegation have revealed the need for better adherence to regulatory compliance by banks as some aberrations have been found.

It also said that banks are not carrying out customer due diligence as per requirements while marketing and distributing third-party products and said guidelines with remedial action regarding the same will come later.

Referring to customer services, it asked banks to stop differential treatment to home-branch and non-home branch customers, apart from asking banks to price retail loans at uniform rates.

With the falling gold prices making lenders uncomfortable, it also asked banks not to lend against gold coins above 50 grams.

Following are the highlights of the RBI's annual monetary policy 2013-14:

* Key short-term lending rate (repo) cut by 0.25 pc to 7.25 pc.
* Cash reserve ratio kept unchanged at 4 per cent.
* RBI says assessment of growth-inflation dynamics limits scope for further easing of policy rate.
* FY14 GDP growth pegged at 5.7 per cent, down from govt's estimates.
* Inflation to remain range-bound around 5.5 pc in FY14.
* CAD is the biggest risk to the economy.
* RBI proposes doubling of limits on priority sector lending to MSMEs to Rs 5 cr.
* Banks asked to stop differential treatment to home-branch and non-home branch customers.
* RBI says probe into Cobrapost's sting operation calls for a better regulatory compliance by banks.
* Banks not carrying out customer due diligence as required while marketing and distributing third-party products.
* RBI proposes restricting gold imports only to meet genuine needs of exporters of gold jewellery.
* Banks asked to set up mechanism to monitor and review implementation of Direct Benefit Transfer.
* Mid-quarter review of policy on 17th June.