New Delhi: The Reserve Bank of India (RBI) may leave interest rates unchanged in its quarterly monetary policy review this month, preferring to wait for further clarity on inflation before reversing its accommodative stance, said C. Rangarajan, chairman of the Prime Minister’s economic advisory council.
“Unless inflationary pressures are very strong, there may not be any change in the stance,” Rangarajan told reporters on Wednesday on the sidelines of an event organized by the Indian Council for Research on International Economic Relations and the Centre for Monitoring Indian Economy.
RBI has since October last year lowered its key policy rates steeply and cut the cash reserve ratio, or the proportion of deposits that commercial banks are required to keep with the central bank, to shield the economy from the global financial crisis.
The central bank is due to make its next monetary policy statement on 27 October. RBI governor D. Subbarao had said earlier this month that India may need to tighten expansionary fiscal and monetary policies before advanced economies do.
Wholesale price inflation, measured at 0.7% in the week ended 26 September, is expected by RBI to reach 5% by the end of the fiscal in March.
“There is always a seasonal decline in prices in November and December,” Rangarajan, himself a former RBI governor, said. “So, one might want to wait and see whether the seasonal decline occurs or not, and take action after the behaviour of prices.”
Rangarajan, who expects inflation to touch 6% by end-March, said RBI could, however, stop injecting liquidity into the system through open-market operations, under which it buys government securities from the market, to curb surplus cash as part of its efforts to rein in inflation.
With strong industrial growth for three months in a row till August and automobile sales increasing, the prospects of policy being tightened have strengthened. RBI has to contend with a burgeoning fiscal deficit apart from the wholesale price inflation accelerating.
Rangarajan said the government’s huge borrowing programme may become problematic, adding that the fiscal deficit in the current fiscal—projected at 6.8% of gross domestic product (GDP)—isn’t sustainable. “Some efforts should be made to bring it down,” he said.
However, he does not see any contraction in public expenditure before March. “It will take three-four years to come back to the deficit targets set by the Fiscal Responsibility and Budget Management Act,” he said. The Act set a fiscal deficit target of 3% of GDP for the government and required it to reduce the revenue deficit eventually to zero.
Rangarajan expects GDP growth during the current fiscal at close to 6.5% while farm output may contract 2-2.5% from a year earlier following an erratic monsoon. Industrial output, which rose to a 22-month high of 10.4% in August, is spearheading overall economic growth.
“To some extent, the high growth (in industrial production) in August is also due to the low base of last year,” Rangarajan said. “But even allowing for that, I think there’s a substantial increase in August industrial production. For the year as a whole, we could see close to 8% growth in industrial production.”