Big cut? Subbarao allays CAD fears
Thu, 14 Mar 2013-09:30am , Mumbai , DNA
The Reserve Bank of India (RBI) seems to have changed its stance on current account deficit (CAD): it is no longer an impediment to interest rate cuts.
That’s the only deduction possible from governor D Subbarao’s speech delivered to the London School of Economics on Wednesday.
In it, he gave four reasons why another rate cut may not lead to a wider current account deficit:
“First, when growth is sluggish -- as is the case now -- a rate cut is unlikely to translate into import demand,” said Subbarao.
“This can be backed by decade-low GDP estimates for current financial year. Also, recent data on trade deficit showed that imports grew at a slower pace of 2.6% in January.”
Secondly, he said, the 25 basis points rate cut in January was a response to softening inflation, which will improve India’s export competitiveness.
Thirdly, the cut also came about because commodity prices, especially crude oil, had eased reducing the pressure on CAD.
Lastly, he said, in emerging economies like India, import demand is less a function of lower interest rate than of increased income. “In other words, the marginal propensity to import by borrowing money is small,” said Subbarao.
That’s a big change from his stance after the previous monetary policy review where, in an interaction with analysts and researchers, he said the central bank would take into
account what CAD is while considering a rate cut.
“It will not be driven by the inflation number or trajectory alone,” he had said.
Indeed, on Wednesday, he did say several analysts and commentators have questioned the wisdom and logic of monetary easing at a time when CAD is rising.
Growth has decelerated, inflation is still high and stubborn and investment rate has declined sharply, he pointed out.
CAD is expected to be record high in the third quarter current financial year. It stood at 5.4% at the end of September 2012.
Does all that justification mean a big shift at Mint Road to a sharper focus on growth? The markets should cheer that.
@thtTALLgirl
