Business Standard

Dip in inflation makes case for rate cut

Survey says global financial conditions continued to remain too fragile to provide any external growth stimulus to the economy

BS Reporter  |  Mumbai 

With wholesale price inflation moderating and the government's fiscal situation expected to improve, there is room for further interest rate cuts by the Reserve Bank of India (RBI), according to the Economic Survey released today.

"There has been some moderation in inflation in the third quarter (October-December) of 2012-13 and with the expected fiscal consolidation, the current macroeconomic situation creates room for a somewhat accommodative monetary policy," said the Survey.

With a moderation in non-food manufacturing and global commodity prices, the headline Wholesale Price Index (WPI)-based inflation may be 6.2 to 6.6 per cent in March, said the survey. India's WPI inflation fell to 6.62 per cent in January, the lowest since December 2009. It was 7.18 per cent in the previous month.

In its third-quarter monetary policy held on January 29, the central bank cut the repo rate, or the rate at which it lends money to banks, by 25 basis points (bps) to 7.75 per cent. It was the first rate cut since RBI reduced repo by 50 basis points in April last year. Analysts expect the central bank to loosen its monetary policy in the coming quarters if inflation remains low.

One basis point is one-hundredth of a percentage point.

Emphasising RBI's assessment, the survey said global financial conditions continued to remain too fragile to provide any external growth stimulus to the economy.

The survey justified RBI's stance to keep tight monetary policy during April-December. "Monetary policy has continued to follow a cautious stand, which, while keeping liquidity comfortable to support growth, had to pause in its policy rate reduction during April-December 2012 due to persistent inflation risks."

This cautious monetary policy stance was also considered necessary by RBI in view of the mounting subsidies and deteriorating fiscal situation. "The government in September 2012, however, announced a road map of fiscal consolidation with a clearly defined mid-term fiscal target. It also attempted to improve the investor perception and create a favourable environment for investment," said the survey.

Finance Minister P Chidambaram had earlier said India's fiscal deficit would be contained at 5.3 per cent for the current financial year. He has also set a deficit target of 4.7 per cent for the next financial year.

First Published: Thu, February 28 2013. 00:28 IST