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Gokarn reiterates RBI has more room for monetary easing

RBI deputy governor warns of inflation risks, says pressure is from food prices, fall in the rupee?s exchange rate, and from the fiscal side

Subir Gokarn
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The Reserve Bank of India (RBI) on Monday reiterated the room for it to consider interest rate cuts had increased, thanks to the fall in crude oil prices and deceleration in India’s gross domestic product growth.

“The growth is somewhat lower than expectation and that may have positive, moderating impact on core inflation,” said RBI’s Deputy Governor Subir Gokarn, adding, “Oil prices have come-off somewhat more than expected.”

“Those are the two factors that suggest more room for monetary easing,” he said at a conference organised by Nomura.

Late on Friday, Gokarn, for the first time since April, had said in Kochi that there was more room to cut interest rates.

In April, after slashing the repo rate (at which it lends to banks) by 50 basis points to eight per cent, had said the room to cut further was very low.

Gokarn’s comments on Friday and on Monday seem to suggest the central bank has become more dovish. The yield on the benchmark 8.79 per cent, 2021 government bond has fallen five basis points since Friday to 8.31 per cent on Monday, as traders now expect RBI to cut interest rates at the monetary policy review on June 18. As is typical for any central bank official, Gokarn also warned of inflation risks. “Inflation pressure may still remain. We’ll have to take a balanced view of these factors,” he said.

According to Gokarn, pressure on inflation is seen from food prices, fall in the rupee’s exchange rate, and from the fiscal side.

“There is fiscal pressure in the sense that the actions that were indicated that would bring the fiscal deficit to the budget numbers have not been taken,” Gokarn said. India’s fiscal deficit for 2011-12 (April-March) was at 5.75 per cent of gross domestic product (GDP), compared with the initial budget estimate of 4.6 per cent for the year.

The fiscal deficit target was later revised to 5.9 per cent as the government’s expenditure burgeoned, while revenues remained tepid.

The deficit for the current year has been pegged at 5.1 per cent.

India’s GDP expanded 5.3 per cent in Jan-Mar. The Central Statistics Office has said the 2011-12 GDP is estimated to have expanded at 6.5 per cent, the slowest pace in nine years.

India’s headline inflation rate based on the Wholesale Price Index rose to 7.23 per cent in April from 6.89 per cent in the previous month.

Indicating the central bank’s relief, Gokarn said crude oil prices had come down more than the rupee had depreciated. “So, there is a slight decline in the rupee price of crude. So that is a relief in terms of inflation pressure and has a fiscal implication because it brings under-recoveries down,” he said.

“Oil prices are critical. The fact that they are coming down gives us some space. If we’re able to make the necessary adjustments domestically, that will give us better macroeconomic outcome.” On Friday, India’s crude oil basket fell to an eight-month low of $98.49 a barrel.

After bleeding for nearly six months due to the rise in crude oil prices and fall in the rupee against the dollar, the three state-owned oil retailers on May 23 announced the steepest-ever petrol price rise of Rs 6.28 a litre. On Saturday, though, they slashed the prices by Rs 1.68 a litre.

The rupee has fallen 8.2 per cent since April. It was at 55.43 a dollar as against a record trading low of 56.51 to a dollar on May 31.

Gokarn said the central bank’s focus will be on quickly correcting macroeconomic imbalances back home in order to support the rupee.

The steps taken by RBI so far have been aimed at providing stability to the domestic currency’s exchange rate movement and to limit speculative activity in the currency market, Gokarn said.

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