Economy may recover from slowdown late this year: RBI Governor

Reserve Bank today said Indian economy is likely to recover from the impact of the financial meltdown later this year as stability gets restored in world markets.

"As the monetary and fiscal steps takes way through, and the calm restored in the global markets, we can see an economic turnaround later this year," Reserve Bank Governor D Subbarao said at a financial management summit here.

India's less dependence on merchandise exports and its smooth functioning financial system, comfortable forex reserves and modest inflation will help for a swift recovery from the slow down, Subbarao said.

Cautioning the policy makers about "challenges" in the domestic economy to manage the recovery, Subbarao said, the "unwinding" of measures taken during crisis time will be less painful for India than in other countries.

"While risks from global markets persist, there are challenges in the domestic market (as to) how we manage the recovery in the next six-to-nine-months," Subbarao said. The central bank was confident of achieving a six per cent real GDP growth in 2009-10 as it had projected earlier.

Subbarao said that if global factors favour an early recovery in the domestic market and the already-taken stimulus measures yield results, then it could lessen the need for further stimulus measures. "If the global recovery takes through, there could be a lesser case for further stimulus in the economy," the RBI Governor said.

While Indian banks have continued to function well braving the recession impact abroad, bad loans in the domestic banking system could rise in the period ahead, Subbarao said, adding, however that "This may not pose any systemic risk."

Government's massive borrowing programme has expanded rapidly and was going against the RBI's objective to keep a low interest rate regime, he said, adding that the RBI has been managing the borrowing in an orderly manner.

The pressure for further stimulus measures persists in the domestic economy given uncertain global conditions, Subbarao said, adding the apex bank will use all its policy tools to manage the borrowing programme.

Various stimulus measures including the farm loan waiver and sixth pay commission recommendation, have helped to revive rural demand in the economy, Subbarao said.