Reserve Bank of India Governor D Subbarao said in Tokyo today that there is room for a cut in interest rates admitting that growth moderation may be steeper and more extended than earlier projected. The repo rate or the rate at which the RBI lends to banks and injects liquidity into the system currently is 5.5 per cent and bankers expect it to fall another 100-150 basis points in the coming month.
There certainly is room for cutting rates. The question is whether we should cut rates,when we should cut rates and by how much we should cut rates, he told reporters on the sidelines of a global symposium organized by the Institute for International Monetary Affairs in Tokyo. Its not automatic that inflation is coming down and you cut rates.
The inflation rate dropped to a one-year low of 4.39 per cent for the week-ended January 31 and RBI expects it to drop to less than 3 per cent by March-end. The expectations it may drop below zero gives the central bank elbow room to cut rates. Besides,there is a further compelling reason with clear signs of a sharp powering down of the economy. The industrial output for December actually contracted by 2 per cent.
Citing constitutional propriety,the government announced no new fiscal measures in its interim budget. Therefore,it will be for the RBI to do all it can in the coming months to keep the growth momentum. Further,the government will be barred from announcing any plans or programmes once election dates are announced and the code of conduct kicks in. There will,however,be no such obligation on the RBI.
Earlier,at the conference in Tokyo,Subbarao said,Recent data indicate that the demand for bank credit is slackening despite comfortable liquidity in the system. Higher input costs and dampened demand have dented corporate margins while the uncertainty surrounding the crisis has affected business confidence. The index of industrial production has shown negative growth for two recent months and investment demand is decelerating.
All these factors suggest that growth moderation may be steeper and more extended than earlier projected.
In addressing the fallout of the crisis,he said,India has several advantages. The decline in inflation should support consumption demand and reduce input costs for corporates. Furthermore,the decline in global crude prices and naphtha prices will reduce the size of subsidies to oil and fertilizer companies,opening up fiscal space for infrastructure spending. From the external sector perspective,it is projected that imports will shrink more than exports keeping the current account deficit modest, he said.
Nevertheless,the global crisis will dent Indias growth trajectory as investments and exports slow,he said. Clearly,there is a period of painful adjustment ahead of us. However,once the global economy begins to recover,Indias turnaround will be sharper and swifter,backed by our strong fundamentals and the untapped growth potential, the RBI Governor said. (with agencies)