PM panel head favours more rate cuts

Suresh Tendulkar, chairman of the Prime Minister’s Economic Advisory Council, said today that the repo and reverse repo rates could be cut by another 100 basis points each.

“The current problem is that banks, though well-capitalised, are unwilling to lend. So, if you reduce the reverse repo rate, it generates a disincentive to park funds with the RBI. From that point of view, it is desirable to reduce the reverse repo as well as the repo rate,” Tendulkar told reporters after a seminar.

Without commenting on the timing of the cut, he added the Reserve Bank of India (RBI) is in a better position to assess the liquidity situation and credit growth to decide on the extent of the rate cut.

 

Asked whether any case has been made by Prime Minister Manmohan Singh to further lower the rates, he said, “Since the Prime Minister is steering the high-level committee, where RBI Governor is also a member, clearly that is something that would have happened.”

Effective December 8, RBI lowered the repo rate, or the rate at which it lends to banks, by 100 basis points to 6.5 per cent, the lowest since January. The reverse repo rate, which is the tool used by the central bank to absorb liquidity, was also reduced by the same magnitude to 5 per cent, the lowest in three-and-a-half years.

While Tendulkar said the gross domestic product (GDP) growth rate may slip below 7 per cent in the current financial year, he added the timing of the fresh stimulus package being worked out by the government will depend on the response to the one announced at the start of the month.

“Unless they (the government) ascertain the response of the first package, there is no point of talking about the second one,” he said.

However, he said the initial feedback on the first stimulus package indicated that so far, the benefits are yet reach the intended sections.