Pitching for a benign interest rate regime to boost growth, Chief Economic Adviser Arvind Subramanian has said there is room for rate cut by the Reserve Bank as inflation is low.
"We said in the Survey it (RBI) has more room even with the mandate because inflation forecast is relatively good. There is a whole issue of CPI being so high and WPI being so low, so producers feel the pinch. If you take into account totally the situation, we think there is room for monetary easing," he told PTI in an interview.
Retail inflation for next fiscal is expected to be between 4.5-5%, which is below RBI's projection.
The Consumer Price Index-based retail inflation stood at 5.69% in January. Between April-January, the average CPI inflation stood at 4.9%.
The Reserve Bank, which had set a retail inflation target of around 6% by January 2016, expects the rate of price rise to be around 5% by the end of 2016-17 financial year.
When asked about quantum and timing of rate cut, Subramanian said "the forecast is that we think that there is room for policy easing but how much, the timing - that is not right for me to speculate".
RBI is scheduled to unveil monetary policy for 2016-17 on April 5.
Enunciating reasons for the lag in passing on rate cut benefit by banks to customers, he said: "We actually have done some careful analysis that after October something happened. We think its very tight liquidity that prevented."
The policy rate was reduced substantially in 2015 with no less than four rate cuts cumulating to 1.25%, including a 0.5% cut at the October meeting.
There was much less accommodation in bank lending rates, which have only fallen by around 0.5%.
One possible factor could be changes in liquidity conditions as these can reinforce or negate the changes in policy rates, Subramanian said.
"The reason is straightforward: if liquidity conditions are tight, commercial banks will be extra cautious about passing on policy rate cuts into lower deposit rates, for fear of losing customers and hence more liquidity," the Economic Survey 2015-16 had said.
The Survey also had said that many commentators have emphasised that transmission is limited by high administered and small savings rates.