Low inflation provides room for easing policy rate in A-Pac:UN

Declining inflation has provided space to central banks in the Asia Pacific (A-Pac) region, including India, to lower their policy rates, a UN report said today.
"Inflation has reached a multi-year low, while manufacturing activity has revived, albeit unevenly," said the UN ESCAP report titled 'Economic Social Survey of Asia and the Pacific'.
On the occasion of the report's release, former RBI Deputy Governor Subir Gokarn said: "Domestic compulsion is clearly in favour of reducing rates. Inflation is lower than expected."
About the recent unseasonal rains and hailstorm, he said they have not resulted in firming up of food prices despite crop damage in some parts of the country.

Monsoon is a factor and it may bring in risks but if food stocks are effectively used they would stabilise prices, said Gokarn, who is director of research Brookings Institution India.
At the same time, likely increase in interest rates in the US may lead to capital outflows from A-Pac, and countries with weaker macroeconomic fundamentals are likely to be most affected, said the report.

"This may necessitate higher interest rate by developing economies of the region. Partly because of this, some economies are already keeping real interest rates at a relatively higher level," it said.
On concerns over debt arbitrage situation, as yield on US securities go up as the Federal Reserve raises rate and Indian debt securities would become less attractive leading to capital flight, Gokarn said India would be least affected.

"Looking at the composition of capital inflow, there is higher proportion of equity flow and those equity flows are possibly more responsive to better growth prospect than interest rate arbitrage so pure interest rate differential may not be as important consideration. I don't think it would be that tight corner," he said.
ESCAP analysis shows that countries with better fundamentals will have to increase interest rates, if and when such a need arises, less to defend against capital outflows - positive impact on GDP growth of up to 0.5 percentage points
"Macroprudential policies offer an important complementary method of managing capital flows while allowing governments to preserve monetary policy flexibility and maintaining domestic financial stability," it said.

The ESCAP Inclusiveness Index that captures 15 indicators, covering economic, social and environmental dimensions of development ranks India at 14th position compared to 13th position earlier.
It indicates decline in inclusiveness and rise in disparity.