HIGHLIGHTS 2-Indian cbank chief's comments after first rate cut in 9 months

Tue Jan 29, 2013 6:58am EST

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MUMBAI, Jan 29 (Reuters) - India's central bank lowered its key policy rate
as expected for the first time in nine months to support an economy set for its
slowest growth in a decade, but signalled there was less room for aggressive
cuts in future due to concerns over inflation. 
    Following are Reserve Bank of India Governor Duvvuri Subbarao's comments in
a press conference post policy announcement.

    SUBBARAO ON:
    FURTHER EASING
    "If inflation eases further, by further I mean more than we expect it to and
if current account deficit (CAD) moderates further, by further I mean more than
we expect it to, because by fourth quarter (January-March) CAD might be less a
challenge than in the third quarter, but it has to be significantly less and we
have to have a sustainable CAD."
    "So with inflation moderating and CAD moderating further there will be more
room for monetary policy easing. But if we go along the currently expected lines
the space for monetary easing is quite limited."
    "The message that we are trying to give is that as much as there is some
space, its going to be quite limited, and we are going to use it with a lot of
judgement on timing and quantum."
    
    LIQUIDITY
    "We look at the liquidity situation, the causes for that liquidity situation
and decide whether we to do a CRR or an OMO (open market operation). So, you
should not read one way or the other on the CRR action about our decision on the
OMOs."
    "Yes, CRR is 4 percent now, and in theory it can go down to zero percent.
Some central banks have tested those limits but as far as we are concerned we
have quite a lot of cushion there. I am not suggesting that we will bring it
down to zero or even below 4 percent. The question was about the room available
to us - thats 4 percent."
    
    CURRENT ACCOUNT, FISCAL DEFICIT
    "I do not see fiscal deficit reduction as necessarily contractionary.
Indeed, it might be growth enhancing."
    "By far the biggest risk for inflation and for macroeconomic management is
the current account deficit. Not just high current account deficit but high
current account deficit in the context of slowing growth and high fiscal
deficit." 
    "It is a problem because it has implications for financing the current
account deficit, it has implications for our exchange rate stability and
especially because it is happening in the context of slowing growth, our ability
to attract capital can get affected if flows were stopping. And then in the
context of large fiscal deficit there is a vicious cycle between large fiscal
deficit feeding large current account deficit."

    FORECASTS FROM POLICY REVIEW DOCUMENT
    * Baseline GDP growth forecast for 2012/13 cut to 5.5 percent from 5.8
percent earlier. 
    * Baseline wholesale price index inflation projection for March 2013 cut to
6.8 percent from 7.5 percent.    
    * Cuts M3 projection to 13 percent from 14 percent earlier.
    * Retains credit growth projection at 16 percent.

Full text of statement: 
    here
    * Analyst comments on policy statement: 
    * The India Online special page on the RBI policy review is live here
 ($1 = 53.7 Indian rupees)

 (Compiled by Shamik Paul; Editing by G.Ram Mohan)
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