Room for RBI to cut rates: PM panel

With the inflation rate falling below 4 per cent, the Prime Minister’s advisory panel today said there is room for the Reserve Bank of India (RBI) to signal further interest rate cuts to spur industrial growth, which turned negative for the second time in December this fiscal.

“There is room for rates cut by the RBI,” Prime Minister’s Economic Advisory Council Chairman Tendulkar told PTI.

He, however, declined to specify the percentage of rate cuts that he expected, saying the decision is with the RBI’s domain and the apex bank “will take a call on that”.

After more than a year, inflation fell below 4 per cent to touch 3.92 per cent by the end of the first week of February from close of 13 per cent in August 2008, raising hope for the central bank to slash rates.

The industrial production has contracted for the second time in December by 2 per cent.

Before this, the industrial output fell for the first time in 15 years in October 2008 by 0.3 per cent. RBI Governor D Subbarao had himself said in Tokyo, "There certainly is room for cutting rates.”

Even though the RBI has released over Rs 4,00,000 crore into the system by a series of cuts in policy rates and other tools, it refrained from making any changes in these rates in the third quarterly review of its monetary policy.

Commerce and Industry Minister Kamal Nath had also said, “(The) RBI is looking into the monetary policy and will perhaps respond to it (sliding inflation).”

India’s largest private lender ICICI Bank CEO K V Kamath had said, “When inflation is going towards 2 per cent, there is scope for interest rates to go down.”

When asked whether the fiscal deficit would be a problem for India in the next few years as pointed out by the financial services firm Goldman Sachs, Tendulkar said, “I do not subscribe to that at all.”

On Friday, Goldman Sachs had said in a research report that India’s deficit would not come down substantially over the next few years due to increase in spending, especially on higher wages and unemployment benefits as well as a large increase in the governments interest burden.

The report added India’s fiscal deficit, including both the Centre and the states, would be among the highest in the world. It is likely to be 10.3 per cent of the Gross Domestic Product in the current fiscal and 10 per cent in the next fiscal.

The Centre’s fiscal deficit is projected to be 6 per cent in the current fiscal against 2.5 estimated earlier. For 2009-10, the it is projected to be 5.5 per cent.

If items like oil, fertiliser bonds are also taken into account, the Centre’s deficit would soar further than projected in the Budget.