RBI rings alarm bells, says India's economic growth may fall under 5.8%, caps rate cut talk
RBI said that quality of fiscal adjustment remains a concern, even as fiscal risks have reduced in 2012-13.
Government is working towards achieving revised fiscal deficit target of 5.3 per cent of GDP by restricting both plan and non-plan expenditure during the last quarter of the year, even as significant shortfall in tax revenue is likely. "Increased public investment to crowd in private investment along with removal of structural impediments that is slowing private investment is needed to pull the economy out of the current slowdown," the RBI added.
Since the start of 2012, the RBI said, it has worked towards easing monetary and liquidity conditions in a calibrated manner without jeopardising moderating inflation.
On CAD, it said the widening deficit (CAD) has emerged as a major constraint in easing monetary policy.
"With the likelihood that CAD/GDP ratio may exceed 4 per cent of GDP for the second successive year in 2012-13, prudence is necessary while stimulating aggregate demand," it said.
The CAD/GDP ratio reached its highest ever peak of 5.4 per cent of GDP in Q2 of 2012-13. Early indications are that it may increase further in Q3 of 2012-13. CAD has widened mainly due to worsening trade deficit.
It further said strong capital flows have facilitated financing of CAD, resulting only in marginal draw down of reserves.
While increased FII debt investment limits may enhance inflows, they do not provide a solution to CAD financing on a sustainable
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