Mid-year review hints at more rate cuts by RBI

The mid-year economic review, which was tabled in Parliament on Tuesday, has said that “an aggressive monetary policy may be necessary if the global economic depression continues to adversely affect manufacturing”, thereby indicating a further cut in interest rate.

Addressing a press conference later in the day, chief economic advisor Arvind Virmani pointed out that if growth continues to decelerate, additional monetary and other policies are required.

When specifically asked about the urgency of a rate cut, he however put the onus on the Reserve Bank of India (RBI).

While stating that RBI has to take a call on whether to cut interest rate or not, Virmani said, “looking at the global recession, there should be much greater emphasis on output and growth”.

RBI had recently cut policy rates, following which many banks had their lending rates.
According to the economic review, the GDP growth rate of the country is expected to moderate at around 7% this financial year, from an average annual growth rate of 8.9% in the past five years.

As for the rate of inflation, it is expected to touch the “normal level” by March 2009. According to Virmani, the rate of inflation would be in the range of 5% by the end of the fiscal.

In the recent months, inflation rate had been hovering over the 9 and 10% level, but sobered down to 6.84% last week.

Decline in commodity prices “will assist in a reduction in inflation to normal levels by March 2009, as an increase in global commodity prices was responsible for more than two-thirds of the increase in inflation during January to June 2008 over the corresponding period last year”, the review has observed.

On fiscal deficit, the target is likely to be missed by a wide margin. According to Virmani, India’s fiscal deficit would be at least 5% of the GDP this financial year, which means a 2% increase in the fiscal deficit. The increase in deficit is mainly due to the fiscal stimulus package announced by the government last month. He did not talk about the timing of another round of stimulus package.

In the last Budget the government had targeted the fiscal deficit to come down to 2.5% of the GDP this fiscal, against 3% under the Fiscal Responsibility and Budget Management Act.

Till October 2008, the fiscal deficit for the year has already touched 87.8 per cent of the target.

Besides a fiscal stimulus package of Rs 20,000 crore, the government also announced a 4% excise duty cut across several sectors. The government has already sought an additional Rs 1,47,000 crore from Parliament, as the first and second batch of supplementary demands for grants, increasing the public spending to Rs 900,000 crore from Rs 750,000 crore originally envisaged in the Budget for 2008-09.