Why RBI cut GDP forecast to 5.8%

The Reserve Bank of India on Tuesday sharply lowered this fiscal's economic growth projection to 5.8 per cent, from 6.5 per cent earlier, in view of global and domestic factors like poor investments and subdued demand.

". . .global risks have increased further and domestic risks have become accentuated by halted investment demand, moderation in consumption spending and continuing erosion in export competitiveness accompanied by weakening business and consumer confidence," RBI Governor D Subbarao said in half yearly review of the monetary policy.

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Notwithstanding improvement in rainfall during August andSeptember, he said, the first advance estimates of the 2012 kharif production are somewhat less buoyant in comparison to the previous year.

"Accordingly, even while prospects for agriculture appear resilient, the overall outlook for economic activity remains subdued.

"On these considerations, the baseline projection of gross domestic product growth for 2012-13 is revised downwards to 5.8 per cent," he said.

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Indian economy recorded a growth of 5.5 per cent in the first quarter of 2012-13.

Subbarao noted that the large twin deficits -- the current account deficit and the fiscal deficit -- continue to pose significant risks to both growth and macroeconomic stability.

A large CAD poses challenges for financing it in the current global environment, he said.

In a situation of volatile capital flows, the deficit could exacerbate downward pressures on the rupee, he said, adding that a persistently large fiscal deficit reduces the space for a revival in private spending, particularly investment spending, without quickly re-kindling inflationary pressures.