RBI measures hurt growth forecast

MUMBAI: The Reserve Bank of India’s measures to cut liquidity in the money market means that 6% growth forecast for gross domestic product (GDP) looks unachievable. A host of agencies have brought down their growth forecasts for the current fiscal, the latest being rating agency Crisil which lowered its growth outlook for the current year to 5.5% from 6%.
Earlier this week, another rating agency, ICRA, had lowered its growth forecast to the range of 5.4-5.6%, down from 5.8-6% earlier.The first to lower India’s growth forecast after RBI’s measures was Bank of America Merrill Lynch, which said that the Indian economy was likely to grow 5.5% and not 5.8% as it earlier believed. BoAML was followed by Australian bank Macquarie, which lowered its India growth numbers for this fiscal to 5.3% from 6.2% earlier, citing significant capital outflows and rupee depreciation. A day after Macquarie, Deutsche Bank lowered its growth forecast for the financial year 2013-14 to 5% from 6%, citing weaker macro data and business sentiment.
The revised forecasts following RBI’s measures are almost half a percentage point below the average expected growth rate of 6% as on May. On May 2, RBI’s survey of forecasters showed anticipation of modest recovery in 2013-14 to 6% from 5% in the preceding year. However a, host of forecasters are having second thoughts. All the agencies that lowered their growth forecasts citied RBI’s measures to curb liquidity as a damper for growth. “We have cut our FY14 growth forecast to 5.5% from 5.8% earlier as RBI’s tightening will push back lending rate cuts,” said Merrill Lynch.
According to Deutsche Bank, liquidity tightening by RBI last week was a classic emerging market response to currency weakness. “But in India’s context, we also find it risky in that it pits the benefits from short-circuiting the currency weakness feedback loop, against the possible cost to growth from higher cost of liquidity getting transmitted through to the real economy.”