Slowing growth, falling oil prices suggest room for rate cut: Gokarn

Ahead of the central bank’s mid-quarterly policy review later this month, Reserve Bank of India deputy governor Subir Gokarn on Monday said there could be room for a rate cut because of slowing growth and cheaper oil. 

“Two factors that suggest there is room for a rate cut is the slowdown in growth and the fall in oil prices,” Gokarn told NDTV Profit. 

However, he added that other factors indicated there was no room, and that the RBI would have to "balance these factors".  

India’s economic growth rate for the quarter ended March 2012 came in at 5.3 per cent last week, well below the expected 6.1 per cent, and to 6.5 per cent for fiscal 2012. The RBI had projected a 6.9 per cent growth for the full year. Crude prices on Monday slumped to an eight-month low on poor economic data from the United States.

Gokarn said there is food inflation pressure as well as fiscal pressure, and noted that “actions which were indicated to bring down the fiscal deficit still haven’t been taken”.

“The fall in oil prices is a big relief,” Gokarn added, pointing out that crude prices have fallen more than the rupee has depreciated, a movement that he said “will bring under-recoveries down”.

India imports over 80 per cent of its crude and subsidises diesel, kerosene and LPG. The high subsidy bill is a major contributor to the fiscal deficit, while a large import bill adds to the trade deficit.

Gokarn noted that if oil prices remained at the current level, it would help bring the current account deficit (CDA) down.

Industry has been calling for a rate cut despite a 50 basis point cut in April, claiming a tight liquidity situation is hurting private investment and growth, something Gokarn acknowledged, saying “Growth momentum is moderating” .

“RBI’s projection in 2011-12 was 6.9%, this has moderated more and may have stronger impact on core inflation,” Gokarn said.

However, he said that “At the moment, liquidity is within the RBI’s comfort zone”.