‘FinMin expects monetary easing from Reserve Bank of India’

The official added that the pickup in inflation, as seen for last month, has been taken into account in their analysis while suggesting a rate cut.

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The official said that to address the exchange rate issue, the RBI has been intervening heavily to prevent appreciation of the rupee for the last three months and the real competitiveness of the domestic currency has improved a little bit but still not enough to offset the loss of the previous six months.

The Finance Ministry expects the Reserve Bank of India to consider easing interest rates as it will help to incentivise investment and in turn, promote economic growth. “There is scope for monetary easing because of inflation projections,” a senior finance ministry official said on Saturday, adding that the government analysis is made on the basis of inflation remaining under 4 per cent in the medium term.

The official added that the pickup in inflation, as seen for last month, has been taken into account in their analysis while suggesting a rate cut. In its last policy review in August, the RBI reduced the repo rate by 0.25 per cent to 6 per cent in August, citing reduction in inflation risks. The rate cut was the first in 10 months and brought policy rates to a near 7-year low.

However, retail inflation rose to a five-month high of 3.36 per cent in August due to costlier vegetables and fruits. The consumer price index (CPI) based inflation was 2.36 per cent in July. The official added that the slowdown in the manufacturing sector is due to various reasons and the issues have to be addressed across the board, including interest rate and exchange rate for boosting the manufacturing sector’s growth.

“A number of sectors have been affected…in last 2-3 quarters… manufacturing imports have increased substantially — gems and jewellery, electronics, textiles. Once the effect of demonetisation and GST substantially reverses we should expect those sectors picking up. But those sectors have also been affected by appreciation of currency. So it’s combination of these factors plus appreciation of currency,” the official said. He further said, “The response has to be across the board for boosting manufacturing in the economy like interest rate, exchange rate.”

The government is currently engaged in discussions to chalk out a strategy to support economic growth. On Wednesday, finance minister Arun Jaitley had said that the government will take “any additional moves as necessary” to support economic growth. The official said that to address the exchange rate issue, the RBI has been intervening heavily to prevent appreciation of the rupee for the last three months and the real competitiveness of the domestic currency has improved a little bit but still not enough to offset the loss of the previous six months.

“One other good news is that volume of world exports has increased significantly. So manufacturing will pick up after impact of demonetisation and GST wearing off,” he said. With regard to the Goods and Services Tax (GST), the official said problems with regard to returns filing is coming down. There is a serious concern over behaviour as people tend to file tax returns towards the last date, the official said, adding that collections so far seem to be all right.

Separately, Chief Economic Adviser Arvind Subramanian commented on the appreciation of the rupee, saying that all emerging economies face this problem, with a surge in capital inflow putting pressure on the exchange rate. “All countries struggle with this challenge. Different countries take measures based on their trade-offs and objectives. What the RBI has been doing is to stem appreciation of the rupee,” he pointed out.

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The big appreciation in the rupee between January and April impacted both exports and imports, he said, adding that the RBI has been intervening in the forex market to stem appreciation of rupee. He added that he is hopeful of a moderation in exchange rate in the coming days.