Inflation is likely to moderate below the Reserve Bank's baseline projection of 7.5 per cent, however, suppressed inflation continues to pose a significant risk to the inflation in 2013-14, the RBI has said in its Macroeconomic and Monetary Developments Third Quarter Review 2012-13. The Review released ahead of the RBI Monetary policy review raises fresh questions on threats to inflation and may restrict the RBI's ability to cut rates aggressively.
"Balance of macroeconomic risks suggests monetary policy needs to be calibrated in addressing growth risks as inflation turns stick, " the review has stated.
Following are the highlights:
• Growth in 2012-13 is likely to fall below the Reserve Bank's baseline projection of 5.8 per cent. However, output gap may start closing in 2013-14 although at a slow pace on the back of some revival in investment and consumption demand.
• Inflation is likely to moderate below the Reserve Bank's baseline projection of 7.5 per cent. However, suppressed inflation continues to pose a significant risk to the inflation in 2013-14. As some of the risks materialises, inflation path may turn sticky.
• Various surveys show that business confidence remains subdued. Survey shows that forecasters outside the Reserve Bank anticipate growth to recover from 5.5 per cent in 2012-13 to 6.5 per cent in 2013-14. Average WPI inflation is expected to moderate from 7.5 per cent in 2012-13 to 7.0 per cent in 2013-14.Growth slowdown in India continues with growth remaining below potential for the fifth successive quarter. Policy initiatives of the government are yet to show up fully or definitively in data. Revival may take some more time.
• Rabi crop is expected to be normal despite deficient rains, but is unlikely to fully compensate for kharif deficiency. Sowing under rabi crop has been broadly the same as the level in the previous year.
• Weak industrial performance is likely to persist. Subdued external demand and lack of reliable power supply amidst coal shortages are constraining capacity utilisation. Lead indicators of service sector and the Reserve Bank's Service Sector Composite Indicator signal moderation.
• The Reserve Banks' Order Books, Inventory and Capacity Utilisation Survey shows capacity utilisation increased marginally in Q2 of 2012-13. On a sequential basis, new orders moderated in Q2 of 2012-13.