RBI’s tightening measures can drag GDP growth to sub 5%: experts warn

RBI’s tightening measures can drag GDP growth to sub 5%: experts warnThe Reserve Bank of India's (RBI's) liquidity tightening measures may have an adverse impact on the country's already sluggish economic growth, which could fall below 5 per cent, experts warned.

In July, the central bank announced a series of liquidity tightening measures, such as issuing of more government bonds and limiting banks' overnight borrowing to 0.5 per cent. These measures were introduced to curb depreciation in the value of rupee, which has slipped more than 12 per cent against the US dollar since the start of current financial year.

But, experts are of the view that such measures would increase the downside risk for the Indian economy.

Chetan Ahya, managing director of Morgan Stanley, said, "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."

Indranil Sen Gupta, chief economist at Merrill Lynch, said Indian economy's growth during the current financial year could fall to 4.8 per cent unless the central bank rolls back its liquidity tightening measures.

India's gross domestic product (GDP) grew at a rate of 5 per cent during the financial year 2012-13. In the final three months of the last financial year, GDP growth slipped to just 4.8 per cent.

Meanwhile, the RBI is struggling to arrest depreciation in the value of rupee, which slipped below the psychological level of 60 per US dollar in late June. The depreciation continued and the domestic currency crossed the 61-level in the recent past.