While RBI said there was limited headroom for further rate cuts, ECB did not rule out the possibility of further lowering of rates
Rate cuts by the Reserve Bank of India (RBI) and the European Central Bank (ECB) reverberated at the Asian Development Bank (ADB)’s annual general meeting today, with participants saying inflation was a major problem in many emerging economies, while European countries faced extremely low growth rate.
This led to difference between the guidance given by the ECB yesterday and RBI today in terms of their future actions, even as both cut the rates, those participating in the meeting said.
While RBI categorically stated there was limited headroom for further rate cuts, ECB did not rule out the possibility of further lowering of rates, even as the benchmark rate was cut to as low as 0.50 per cent.
As if to corroborate what RBI has been saying, ADB President Takehiko Nakao said that for many emerging market economies and developing economies, inflation was still a source of instability, and cited the example of food price spikes.
Again, the ADB president seemed to be defending RBI Governor D Subbarao’s statement. Without specifying the country, he said unless governments pursued prudent macroeconomic policies, the monetary policy could be damaged by the pressure from the government regarding monetary financing of fiscal deficit.
In India, automatic financing of fiscal deficit has been discontinued since 1990s. However, still many analysts believe RBI indirectly does finance the deficit through its expansionary tools.
Whether there could be similar or coordinated monetary actions worldwide? In former RBI deputy governor Subir Gokarn’s view, the objectives of monetary actions are different in different parts of the world.
Nakao reiterated his point made yesterday that monetary expansionary policies of the developed world could have positive impact on emerging market economies. So far as the negative impact of asset bubbles are concerned, these could be managed by countries applying specific measures, he said.
However, ADB managing director Rajat Nag cautioned emerging markets, including India, to be alert on asset bubble as a fallout of quantitative easing by developed nations.
“The positive thing of quantitative easing out of Japan and other economies is that they will start to grow, but we have to be wary of building asset bubbles and economic overheating," he told a press conference here.
Even as RBI pegged India's economic growth at 5.7 per cent for the current financial year from an estimated decade low five per cent growth in 2012-13, policy makers and advisers--Finance Minister P Chidambaram, Economic Affairs Secretary Arvind Mayaram and Chief Economic Advisor Raghuram Rajan —were sure India's economy will grow more than six per cent.
Planning Commission deputy chairman Montek Singh Ahluwalia said the government was taking measures to make the economy grow by seven per cent. However, the potential is eight-nine per cent, he added.
Moody’s retains highest ratings to ADB
Indians might have been dismayed at ADB’s compulsion for not increasing lending to India, but the prudent financial policies have resulted the multi-lateral agency to retain its highest rating from Moody’s Investors Services. In its credit analysis released today, Moody’s retained the highest Aaa rating on the bank. Also, it maintained short-term rating at the highest level — P1.
It retained outlook on these ratings at stable.
The finance minister says India's potential growth rate is 8%, the country cannot afford to become complacent and sit back
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