As anticipated, inflationary concerns dominated the monetary stance despite considerable downside risks to growth impulses. The RBI reduced the statutory liquidity ratio (SLR) by 1 per cent in an attempt to support the flow of liquidity and bolster growth. However, this action is likely to be largely symbolic in nature, given the Government’s sizeable planned borrowing programme.

Additionally, the moderation in economic growth is expected to result in a deceleration in credit growth to the industrial and services sectors. This may prompt banks to maintain SLR above the required level, in line with the prevailing trend.

Dampeners

Commodity price movements, the exchange rate of the rupee and the timing of revision of prices of various fuels would influence the inflation trajectory. Notably, the unfavourable progress of monsoon rainfall and sowing of crops remain critical inflationary concerns in the near term.

The bleak outlook for the agriculture sector could boost demand for welfare schemes such as the NREGA, hampering efforts towards fiscal consolidation.

Moreover, a pick-up in demand for diesel to access groundwater for irrigation and the recent uptick in crude oil prices may widen the fuel subsidy bill.

In addition, moderating growth may dampen the pace of expansion of tax revenues and contribute towards the fiscal deficit overshooting the targeted level. This may further reduce the flexibility available to ease monetary policy. Notwithstanding some moderation in commodity prices and the imports of gold in Q1of FY13, the current account deficit is expected to remain considerable, at around 3.5 per cent of GDP in the current fiscal year. A weaker growth outlook would also make attracting non-debt capital inflows more challenging.

We expect the RBI to maintain the policy rate in the near term, until monsoon-related inflationary concerns recede.

(The author is MD & CEO, ICRA Ltd)

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