Wednesday December 24, 09:10 AM

Source: Indian Express Finance

RBI has scope to cut rates, says finmin

The government has shifted the onus of battling the current economic downturn squarely on RBI. The mid-year review of the economy tabled in Parliament by the finance ministry on Tuesday said there is considerable scope to ease monetary policy over the next 6-12 months, implying sharp cuts in key interest rates. The review puts GDP growth in the range of 7-8% for 2008-09 and inflation at 5% by March end. The ministry has argued that monetary measures are essential as the room to raise government expenditure is limited. The fiscal deficit is expected to touch 5% by the end of the year, above the 3% target mandated by the FRBM Act, although declining oil prices are likely to provide some elbowroom in the second half. Fiscal measures already taken by the government to stimulate the economy will widen the deficit by around 2% of GDP, Arvind Virmani, chief economic advisor to the finance ministry, said after tabling the half-yearly review. Having run a tight monetary policy during first half of 2008-9, there is considerable scope for monetary policy easing over the next 6 to 12 months. A proactive monetary policy may be necessary if the global economic depression continues to adversely affect manufacturing, the review stated. The 2018 bond yield closed at 5.74%, up from Monday s close of 5.71%, as banks booked year-end profits, but expectations of further rate cuts by the central bank remained. The yield briefly dipped to a low of 5.62% during the day. The review notes that investment could remain robust in the current year, but there is a risk of progressive decline. The review also said although private consumption growth fell in the second quarter, declining commodity prices would raise the disposable income of consumers. Even if there is considerable moderation in the growth rate of investment, GDP growth of 7-8% for the fiscal year 2008-09 as a whole is feasible, the review stated. As uncertainties prevail in the global market, and major economies like the US, Europe and Japan in recession, it would mainly be domestic investment and consumption that would stimulate growth in the Indian economy, the review stated. The review also cautioned against a likely fall in the investment rate, suggesting that the government should pitch in should investment decline.