Full Text - RBI's Third Quarter Review of Monetary Policy Statement 2012-13
II. Outlook and Projections
30. Macroeconomic management going forward is subject to a number of risks as indicated below:
i) Domestically, the widening of the CAD to historically high levels in the context of a large fiscal deficit and slowing growth exposes the economy to the risks from twin deficits. Financing the CAD with increasingly risky and volatile flows increases the economy’s vulnerability to sudden shifts in risk appetite and liquidity preference, potentially threatening macroeconomic and exchange rate stability. Large fiscal deficits will accentuate the CAD risk, further crowd out private investment and stunt growth impulses.
ii) Global risks remain elevated, with the potential for spillovers on the Indian economy through trade, finance and confidence channels. In the US, the risk of political inaction to manage the debt ceiling or even a sudden onset of fiscal austerity can lead to turmoil in financial markets, followed by a downturn in economic activity. Escalation of the euro area sovereign debt stress in view of the continuing absence of credible and comprehensive policy responses remains a contingent global risk, along with geopolitical tensions that can adversely impact supplies/prices of key commodities, particularly of crude oil. These forces can potentially increase global risk aversion with implications for financing of the CAD.
iii) Inflation over the last three years has been a result of demand pressures as well as supply constraints. With demand pressures now on the ebb, the supply constraints need to be urgently addressed. This will require developing an adequate, credible and flexible supply response in respect of those commodities and segments of the economy characterised by structural imbalances. In the absence of an effective supply response, inflationary pressures may return and persist with adverse implications for macroeconomic stability.
iv) The key to stimulating growth is a vigorous and sustained revival in investment. Achieving this will, however, depend on a number of factors such as bridging the infrastructure gaps, especially in power and transport, hastening approvals, removing procedural bottlenecks, and improving governance.
v) Risk aversion in the banking system stemming from concerns relating to asset quality is constraining credit flow. Notwithstanding the importance of repairing asset quality, banks should be discerning in their loan decisions and ensure adequate credit flow to productive sectors of the economy.
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