RBI's measures can pull growth to sub 5%: Experts

The recent monetary tightening measures by the Reserve Bank is increasing the downside risk to the country's growth outlook, which could fall to sub 5 per cent in the current financial year, if these measures are prolonged, says experts. According to foreign brokerage Bank of America Merrill Lynch (BofA-ML), prolonging the recent liquidity tightening moves by the Reserve Bank may have an adverse impact on GDP growth which could slip to a low of 4.8 per cent.

Even Morgan Stanley’s research note said that the recent monetary tightening and uncertain global capital market environment could mean growth stays low for at least two more quarters and increases the risk of GDP growth sliding to 3.5-4 per cent level. India's growth fell to a decade's low of 5 percent in fiscal 2012-13. India's GDP growth was below 5 per cent during the quarters ending December-2012 and March-2013 and is unlikely to have increased during the quarter ending June 2013, Morgan Stanley said in a research document.

"A weak growth trend lasting for 4-5 quarters would increase the risk of a vicious cycle building, whereby the economy becomes vulnerable and the risk increases of GDP growth sliding to 3.5-4 percent," Morgan Stanley Managing Director and the Asia Pacific Economist Chetan Ahya said. Further DSP Merrill Lynch Chief Economist Indranil Sen Gupta said, "…incoming data should reinforce our view that fiscal 2014 growth will slip to 4.8 per cent if RBI tightening is not rolled back before the October-March busy season."

In two sets of announcements last month, the RBI had taken a string of liquidity tightening measures aimed at curbing speculation on the depreciating rupee, which has lost nearly 12 per cent against the dollar since the start of FY14.
The unconventional steps included limiting banks' overnight borrowing to 0.5 percent of their net demand and time liabilities, more sales of government bonds and raising the interest rate on the marginal standing facility for banks.

Morgan Stanley further noted that, if the rupee continues with the downtrend, the government is likely to augment capital inflows in some form of dollar debt. However, such a move would only help cushion the pace of weakening in the currency, and not make a major difference in the trend unless the global environment changes, it said. "A sustainable solution would be to accelerate implementation of structural reforms that in turn help correct the imbalances in the economy and put it back on a positive productivity dynamic," Morgan Stanley said.

The rupee crossed the psychological level of 60 per dollar in June-end and crossed the 61-level for the second time this week.

To contain CAD : Govt to impose higher duties on non-essential imports
New Delhi (PTI): An inter-ministerial panel has suggested higher taxes for non-essential imports with a view to curbing inward shipments and containing the current account deficit (CAD). The Committee has also suggested a list of non-essential items the import of which could be compressed, with a view to bridge the trade gap. These suggestions form part of the recommendations made by the Committee set up by Finance Minister under the chairmanship of Rajat Bhargava, Joint Secretary (Budget Division) to suggest steps to contain the rising CAD, which had touched a record high of 4.8 per cent of GDP in the last fiscal.

"The panel has suggested higher taxes on those non- essential items which do not add to inflationary pressures," sources said. Chidambaram had earlier said that the government would be looking at "some compression in non-oil and non-gold imports, especially of non-essential goods", citing the example of coal and electronic hardware. For the April-June period this fiscal, exports were down by 1.41 per cent at $72.45 billion over the same period last year. However, imports during the period were up by 5.99 per cent at $122.6 billion. Trade gap in the first quarter stood at over $50 billion.