India's long wait for rate cut seen ending as RBI reviews policy
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"Monetary policy needs to continue to be calibrated in addressing growth risks as inflation remains above the Reserve Bank's comfort level and macro economic risks from twin deficits persists," the report warned.
It said recent government reforms had staved off near term risks on the fiscal front, but sustained fiscal consolidation was needed to create room for monetary easing.
"Reforms in September 2012 have reduced immediate risks, but there is a long road ahead to bring about a sustainable turnaround for the Indian economy," the report said.
It also warned that widening current account deficit would also constrain chances to ease policy, even if inflation were to slow further.
The current account gap touched a record high of 5.4 percent in July-September and is likely to rise further in the December quarter, the RBI said.
While measures taken by the government to bring the fiscal deficit within a targeted 5.3 percent of GDP have reduced near term risks, cuts in politically sensitive subsidies were needed for sustainable fiscal consolidation, the RBI added in its quarterly economic report.
The RBI also said its survey of professional forecasters had lowered the growth forecast for the 2012/13 fiscal year ending March to 5.5 percent from 5.7 percent.
GDP growth that once looked set to hit double-digits has been stuck below 6 percent for the past few quarters.
The report went on to say that while inflation was likely to moderate in the current quarter ending in March, there were still significant risks posed to prices by suppressed inflation.
Looking ahead, the RBI will be calculating how much leeway it has left to ease once it sees the government's annual budget, due to be presented in late February by Finance Minister P. Chidambaram.
"The next step in monetary policy will be taken on the back of measures taken to back up the fiscal consolidation roadmap. A lot will ride on the budget," said Shubhada Rao, chief economist at Yes Bank in Mumbai.