Economists for bank rate cut but agree CAD a larger problem

RBI reduced repo rate in two consecutive policy meets-in Jan & March-by 25 bps each

The Reserve Bank of India brass today met the economists of several banks, as part of the exercise before the annual review, on May 3, of monetary policy. Several, it appears, favoured a rate cut to re-start the investment cycle.

“Most of the participants expected a further reduction in interest rates, which is important to start the investment for reviving growth,” said a person who attended. RBI had reduced the key policy rate, the repo, in consecutive policy meets, in January and in March, by 25 basis points each.

The repo rate, at which it lends to banks, is now at 7.5 per cent. Most economists expected a 25 bps cut in the policy rate. But, economists have also cited concerns on the widening currency gap, which could limit the scope for further policy easing.  Anchoring of inflation expectations, due to divergence between retail and wholesale inflation, is another area needing attention.

The country’s current account deficit (CAD) hit a record $32.6 billion in the October-December quarter.

For the April-December period, it was $71.7 bn, equivalent to 5.4 per cent of gross domestic product. RBI Governor D Subbarao recently said such a level of CAD was unsustainable, adding a deficit of about 2.5 per cent of GDP would be sustainable. For the entire year which ended on March 31, it was unlikely to be less than five per cent, Subbarao had said.