BackS&P sees further cuts in policy rate this year
However, credit rating agency expects no scope for aggressive monetary policy easing
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New Delhi: Credit rating agency Standard and Poor’s (S&P’s) expects the Indian central bank to cut policy rates further in 2013, though it sees no scope for aggressive monetary policy easing.
Speaking to reporters on the sidelines of the annual meeting of the Asian Development Bank (ADB) on Saturday, the Asia-Pacific chief economist of the rating agency Paul Gruenwald said the Reserve Bank of India (RBI) is in a tricky situation because fiscal policy is a bit loose and it is trying to counter that. “We may see one or two more rate cuts this year. But we don’t see a super aggressive path for rate cut by RBI," he added.
RBI on Friday cut policy rates by 25 basis points. However, it maintained that given the current growth-inflation dynamic, there is “little space for further monetary easing".
Gruenwald said India could maintain a sustainable 7-8% growth rate if it is able to bring down its fiscal and current account deficits (CAD) to 3% of gross domestic product (GDP) level and create an enabling environment for attracting foreign direct investment (FDI).
“We think a sustainable level of CAD for India is in the range of 2.5-3%. We certainly think CAD for India has peaked, probably because the gold and oil prices have come down. India has to create a conducive investment regime to attract long-term capital inflows to finance its CAD rather than depending on short-term inflows," he added.
S&P has projected the Indian economy to grow 6% in 2013-14 and 6.7% in 2014-15. However, Gruenwald said there are more downside risks to the rating agency’s growth projection for the current year.
Gruenwald said the Indian economy has slowed because there was concern about the quality of FDI regime and the high fiscal deficit, which slowed capital inflows
“Whenever there is a spike in global risk appetite, investors want to sell in emerging Asia. When you get a round of risk aversion and money starts flowing out of Asia, then India takes a bigger hit because the markets are looking at the twin deficit, which then feeds back into the real economy. This is why India slowed more than rest of the region," he added.
However, the rating agency thinks the India story is relatively positive in the medium to long run. “It is certainly not a disastrous story. But it is certainly down from some of the numbers we saw going to the global financial crisis," he added.
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