The government has come to a judgement that in the growth-versus-inflation debate, the balance is now clearly in favour of growth and more corrective measures, specifically, monetary actions, such as a further cut in the signal repo rate, need to be taken to help India sustain the growth momentum.
The US Federal Reserve cut interest rates by 0.5 percentage points today, joining a new round of global cuts kicked off by China. China and India increasingly appear to be the world’s last engine of economic growth. China cut its interest rate to 6.66 percent from 6.93.
“Monetary policy (in India) has dual objectives: growth and inflation. The weights have clearly changed in favour of growth,” Arvind Virmani, Chief Economic Advisor in the Ministry of Finance, told The Indian Express in an interview today. (Excerpts tomorrow).
“Producers and other economic players are not clear what is happening to the monetary stance or how the policy will evolve. So, there are apprehensions in the short-term,” Virmani said. When asked if these doubts must be cleared by more CRR and repo rate cuts, he said, “That is for the RBI to decide.” But, clearly, “the negative signals on industrial output had increased”, he noted.
Prime Minister Manmohan Singh called Finance Minister P Chidambaram and Reserve Bank of India Governor D Subbarao on Monday — a day after he returned to New Delhi from his five-day official tour to Tokyo and Beijing — to discuss further corrective measures, specifically monetary, that would help the economy sustain its growth momentum.
The RBI slashed CRR by 250 basis points to 6.5 per cent and the repo rate by 100 basis points to 8 per cent in the run-up to the review of the credit policy on October 24. It, however, left all rates untouched on the day the policy was announced. In an interview to Financial Times this week, Subbarao called for a “coordinated Asian response” similar to the one done by the G-7.
Following a Diwali break on October 28, Chidambaram met Subbarao, RBI Deputy Governor Rakesh Mohan and Securities and Exchange Board of India (Sebi) Chairman CB Bhave today to take stock of the situation in the capital markets and the financial system.
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Last week, he had also met select foreign institutional investors (FIIs) to get a first-hand view of their assessment of the Indian economy and impress upon them its strong fundamentals. FIIs have pulled out $13 billion so far this calendar year from Indian equities to make good a credit shortfall in their home countries.
While Subbarao told reporters after his meeting that he would not make any announcements on North Block corridors, the expectation of a more liberal monetary stance in the government was palpable. “A further cut in the CRR soon and a lowering of the repo rate in the short-term (three months) is likely,” said another finance ministry official.
It is learnt that the RBI governor pointed to the increased transactions in the reverse repo auctions to suggest that liquidity concerns had been addressed for now. But according to government officials, this also partly reflected banks’ reluctance to extend credit to the corporate sector when the short-term outlook for the economy seems cloudy. “Banks which have huge current and savings account balances are averse to lending and find the 6 per cent returns on deposits with the RBI under the reverse repo window more prudent,” they said.
The Ministry of Finance is keen that banks lend to productive sectors and do not create an artificial credit scarcity. As a majority stakeholder in public sector banks, the government has been prodding banks to restore confidence and trust in the system by continuing to lend to the corporate sector.
