RBI hints at further rate cuts

Reserve Bank of India Governor D Subbarao today said that there was further room to cut interest rates.

"There certainly is room for cutting rates. The question is whether we should cut rates, when we should cut rates and by how much we should cut rates," Subbarao told reporters in Tokyo after attending a conference.

He also said that India is still committed to opening its capital account further but it will draw lessons from the current crisis on how to proceed. At the conference Subbarao said that India may see a further downturn in investment demand before it turns up but its current account deficit may be smaller than expected.

Further, the RBI governor said that India's combined fiscal deficit of states and central government may reach as much as 10 percent of gross domestic product during the current financial year. "This year 2008-09 the expectation is that the fiscal deficit, combined fiscal deficit of the centre and states is going to be as much as 10 percent. So that is a concern," he said.

The moderation in economic growth (for India) may be steeper and more extended than previous projection, he said.  The government has projected 7.1 per cent growth for 2008-09 and seven per cent for the next fiscal year (2009-10).

There are signs that economic activity in India are slowing down. The index of industrial production has shown negative growth for two recent months and investment demand is decelerating. Plus, the services sector, which has been prime growth engine for the last five years, is also slowing. The service segments like construction, transport and communication, trade, hotels and restaurants are shown drop in the activity levels.

He said for the first time in seven years, exports have declined in absolute terms for three months in a row during October-December 2008. Higher input costs and dampened demand have dented corporate margins while the uncertainty surrounding the crisis has affected business confidence. RBI governor added.

Going forward, the monetary policy stance will continue to be to maintain comfortable rupee and foreign exchange liquidity positions, he said.

Referring to availability of resources for various segments, Subbarao said there are indications that pressures on mutual funds have eased. Non-banking finance companies are also making the necessary adjustments to balance their assets and liabilities.

He said RBI expects that commercial banks will take cue from the policy rates reduction to adjust (cut ) their deposit and lending rates to keep credit flowing to productive sectors.

The special refinance windows opened for the micro, small and medium enterprises (MSME sector), housing sector and export sector should also see credit flowing to these sectors, he added.

Also, the Special purpose vehicle (SPV) set up for extending assistance to NBFCs should enable lending to pick up steam once again.

The decline in inflation should support consumption demand and reduce input costs for corporates. Furthermore, the decline in global crude prices and naphtha prices will reduce the size of subsidies to oil and fertilizer companies, opening up fiscal space for infrastructure spending, he added.