BackRaghuram Rajan can comfortably cut rates again: RBI adviser
Arvind Virmani says with the world economy performing below potential and the risk of deflation looming, space to ease is opening up
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Mumbai: Reserve Bank of India (RBI) governor Raghuram Rajan can “comfortably" lower India’s policy rate by another 75 basis points to a five-year low of 6%, a central bank adviser said.
With the world economy performing below potential and the risk of deflation looming, space to ease is opening up, Arvind Virmani said in an interview in Mumbai on Friday. He saw a 50% probability inflation will end March between 4.5% to 5%, near the RBI’s target for March 2017.
“It’s not 2000 when there was a global boom," said Virmani, one of seven members of the RBI’s advisory panel on monetary policy. “Now it’s a different situation and one has to adjust one’s thinking, and I think that’s happened."
Rajan slashed interest rates more than expected last month and said policy has to be as accommodative as possible given global economic weaknesses. Finance minister Arun Jaitley praised the decision, saying it would help bolster the economy as the government stays committed to narrowing the fiscal deficit.
Signs of slowing global growth prompted the US Federal Reserve in September to leave interest rates near zero, where they have been since 2008. Gauges of manufacturing strength have wavered through America, Germany and China, threatening to jeopardize the economic recovery.
Jaitley plans to reduce the budget deficit to an eight-year low of 3.9% of gross domestic product (GDP) in the year through March 2016. He deviated from the previous government’s plan to lower it to 3.6% by then to boost investment and kick-start economic growth.
“When everybody else was saying that now you have scope, let the fiscal deficit expand and spend more on investment, I had argued, ‘no, don’t do that’," Virmani said. “The global situation is too risky. When there are too many risks involved, you want to stick to your fiscal deficit target as you are dependent on capital flows."
Swaps signal that Rajan will leave the benchmark repurchase rate at 6.75% through December after lowering it 125 basis points this year as inflation slowed. Traders, however, are pricing in the possibility of a reduction to about 6.5% by the end of 2016, according to data compiled by HSBC Holdings Plc.
India’s combined federal and state deficit—at 7% of GDP—is the widest in Asia and among peers that carry the lowest investment grade credit rating, according to Fitch Ratings. Even so, India’s external profile is improving and GDP growth of more than 7% beats the median of 2.7% among similar-rated peers, the company’s data show.
“Fiscals are the Achilles’ heel of India’s profile," Thomas Rookmaaker, a director at Fitch, said in an interview in Mumbai on Friday. “In the budget we haven’t seen too many measures to improve the fiscal."
While Jaitley’s plan to roll out a national sales tax and cut the corporate tax rate are positive steps, they won’t lead to any jump in revenue, he said.
One way India can improve its fiscal position is through spurring investment rather than consumption, according to Virmani. That will have a bigger impact on economic growth, he said.
“That’s why I keep insisting on both the monetary part and the fiscal part," he said. “They can’t work in isolation." Bloomberg
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