Why RBI Has Limited Scope To Cut Rates

"By definition if growth is picking up and inflation is rising, there is less scope of monetary easing," said Chief Economic Adviser Arvind Subramanian.

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Why RBI Has Limited Scope To Cut Rates

Retail inflation crossed RBI's comfort level and rose to 5.21% in December.


New Delhi: Chief Economic Adviser Arvind Subramanian today indicated that the scope for RBI to lower interest rate may be limited with growth picking up and inflation hardening.

RBI, which is slated to announce the next monetary policy review on February 7, has maintained status quo on interest rate since August last year.

"By definition if growth is picking up and inflation is rising, there is less scope of monetary easing. By definition that's true," he told PTI when asked about possibility of rate cut by by the central bank.

He added however that it would be inappropriate for him to comment on rate cut as it is the domain of the Reserve Bank of India.

RBI had last cut interest rate by 25 basis points to 6 per cent on August 2, 2017.

On whether he has changed his views on monetary policy stance, Subramanian said, it is "relative to what I said earlier...not relative to today but what I said earlier. I am not saying rate should go up at all".

Asked whether RBI missed the bus for lowering interest rate, he said, "For about 18 months we could have had lower interest rate. Now, I think they are probably more consistent with inflation outlook".

Now the cycle has turned, he said, adding that the inflationary pressure is mounting.

Retail inflation crossed the RBI's comfort level and rose to 5.21 per cent in December on rise in prices of food items.

The retail inflation, based on Consumer Price Index (CPI), was 4.88 per cent in November. In December 2015, it was 3.41 per cent.

The Reserve Bank has been asked by the government to keep inflation at 4 per cent, plus or minus 2 per cent, and its rise beyond the comfort zone will put pressure on the central bank not to cut interest rate (repo rate).

Observing that directionally economy seems to be picking up quite nicely, he said, "exports have also been picking up briskly and driving India's economic growth... Over the next few years, we can grow between 8-10 per cent," he said.

India, as per the Economic Survey released today, is expected to regain the world's fastest growing major economy tag as it is likely to clock 7-7.5 per cent growth rate in 2018-19, up from 6.75 per cent in the current fiscal.

Earlier, addressing the media, Subramanian said there are concerns like high global oil prices and a sharp correction in elevated stock market as they could suddenly impact capital flows.

"We need to watch out oil prices...we had thought that oil prices would not go beyond $55-60...we were wrong," he said, adding that the crude level for calculation of GDP for 2018-19 is estimated at 12 per cent higher than the current fiscal.

Saudi company Aramco's listing may be contributing to rise in oil prices, he added.

"The higher assets prices go, the more vigilant we should be... Indian stock rise is different from other economies, as Indian stock prices rise reflects massive portfolio reallocation from gold and real estate to stocks. So, heightened vigilance is called for," he said.

Going forward, he said, the impact of Goods and Services Tax (GST) and demonetisation will be less or zero.

He ruled out any negative impact of GST and demonetisation in the next fiscal.

"Going forward, my sense is that we are going to see big increase in GST revenue collection. The process of improvement in compliance is going to be important... Over some time horizon of 3-5 years, we can think of having one GST rate. In the short run, there is greater case for simplification and rationalisation," he said.

On farm sector distress, Subramanaian said, "We need to have mechanism to protect farmers from downside risks...we will have to get more people out of agriculture."

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)


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