RBI calls for more reforms to restore investor confidence

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RBI on Monday said recent reforms have reduced the immediate risks for the economy

Mumbai, Jan 28 (PTI) :The Reserve Bank of India on Monday said recent reforms have reduced the immediate risks for the economy but emphasised on the need for more measures to restore investor confidence.

Flagging concerns about fiscal and external imbalances in the economy, the apex bank said that more reforms are required, especially in road and power sectors, to remove the investment bottlenecks.

“The fresh round of reforms that were initiated in September 2012, after a hiatus, has reduced the immediate risks facing the Indian economy…

“On the whole it appears that the reform measures taken so far have not decisively lifted business sentiments and further action may be needed to restore confidence,” RBI said in its third quarter review of Macroeconomic and Monetary Development.

The monetary policy, RBI said, could focus more on boosting growth after the reform actions get executed.

“While government has embarked on a fiscal adjustment path, staying on this course over the medium-term is necessary for providing sufficient space for monetary policy to stimulate growth,” RBI said.

In the past couple of months the government has taken a host of reforms initiative including opening the multi-brand retail chain to FDI, and also the Union Cabinet has approved hiking foreign investment limits in the insurance and pension sectors.

Earlier this month, the government also allowed partial deregulation of diesel prices, besides limiting the number of subsidised LPG cylinders to nine per family a year.

“Fiscal risks have somewhat moderated in 2012-13, but a sustained commitment to fiscal consolidation is needed to generate monetary space,” RBI said.

On an overall assessment of macro-economic situation, the RBI said, monetary policy would undertake only calibrated action in view of inflation, which at over 7.18 per cent in December, was much above the central bank’s comfort level.

Average WPI inflation, it said, was expected to moderate from 7.5 per cent in 2012-13 to 7.0 per cent in 2013-14.

The economic growth in 2012-13 was likely to fall below its projection of 5.8 per cent, RBI said, adding “output gap may start closing in 2013-14 although at a slow pace on the back of some revival in investment and consumption demand.”

The revival of growth, which has remained below potential for the fifth successive quarter might take some more time as “policy initiatives of the government are yet to show up fully or definitively in data.” the RBI said.

Moreover, it said, the weak industrial performance was likely to persist on account of factors like subdued external demand and lack of reliable power supply amidst coal shortages.

“Investment intentions in new projects improved marginally in Q2 of 2012-13, but investment is held back by project delays. Coal supply issues facing power sectors are yet to be fully resolved. Road investments have stalled due to issues relating to environmental clearances, land acquisition and financial closures”, RBI said.

Observing that improvement in investment climate is a prerequisite for economic recovery, the RBI said, “demand conditions remained tepid, with private consumption continuing to decelerate and with investment yet to recover”.

It further said that the trend of sluggish sales by India Inc was likely to continue in the third quarter of the current fiscal.

The RBI has held interest rates steady for the last nine months since April policy review as it wanted the government to execute fiscal measures to improve investment climate.

“…There is a long road ahead to bring about a sustainable turnaround for the Indian economy,” RBI said, adding that the economy could start turning around in 2013-14 as the impediments to investments are removed.

“However, weak global economic conditions, domestic business constraints and low confidence levels may keep the recovery modest next year, while the near-term risks to the economy emanating from fiscal and external imbalances remain,” it said.

The RBI further said that the economic growth in the current fiscal is likely to fall below the earlier estimate of 5.8 per cent.

The RBI-sponsored survey lowers economic growth projection to 5.5 per cent for 2012-13, and 6.5 per cent for next fiscal.

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