Amid demands for rate cut to jump start the economy, the Reserve Bank on Thursday said that scope for easing of monetary policy is limited in view of high retail inflation and widening current account deficit (CAD).

“While demand—side inflation pressures reduced, high consumer price inflation along with the CAD well above sustainable levels limit the space for monetary policy to support growth,” RBI said in the Macroeconomic and Monetary Developments report released on the eve of the annual policy for 2013—14.

Noting that the recent fall in the prices of gold and crude give a “much needed relief”, it said being complacent on a temporary phenomenon would be “myopic“.

The central bank has already reduced key interest rate by 1 per cent during 2012—13 and pressure is mounting on it to further cut rates in the annual policy to boost growth, which fell to a decade’s low of 5 per cent in the last fiscal.

On inflation, the report said the trend of downward spiral will continue through first half, while suppressed inflation in the form of upward revision in energy prices and a base effect will lead to an increase in the second half.

A revival in growth in the current fiscal is likely, but the recovery would be modest in the backdrop of stagnating industrial output, RBI said.

A survey of professional forecasters sponsored by RBI expects the growth to improve to 6 per cent in 2013—14, and the average headline inflation to moderate to 6.5 per cent.

The nearly 20 per cent fall in commodity prices, and inflation at a 3 year low of 5.96 per cent in March, has led to expectations among the industry of cut in key policy rates.

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