Govt says RBI's bias towards growth may deepen

NEW DELHI (Reuters) - Faced with the global financial crisis and a slowing economy, India’s monetary policy is biased towards stimulating growth, and the Reserve Bank of India (RBI) is likely to lower rates as inflation cools, the finance minister said.

Labourers work at a construction site as sun sets in New Delhi in this February 16, 2008 file photo. India's economy is likely to slow this fiscal year but growth of 7-8 percent will still be among the best given the financial crisis and a slowdown in major nations, the finance ministry said in a report on Monday. REUTERS/Adnan Abidi

“Taking note of the downturn in the inflation rate, RBI has lowered the policy rate as well as the reserve requirements. RBI’s policy is now biased towards stimulating growth,” Chidambaram said, referring to the Reserve Bank of India.

“If the rate of inflation continues to decline, the policy rates may also moderate and the bias in favour of growth may deepen,” he told a meeting with economic editors on Monday.

Indian policymakers are grappling with the impact of the global financial crisis on the broader economy and have taken several steps in recent weeks, including sharp cuts to interest rates and banks’ reserve requirements, to protect the economy.

Chidambaram said expansion would moderate this fiscal year after the world’s credit woes arrived on India’s shores and high interest rates to tame inflation trimmed demand.

But in a report prepared for the meeting, he said: “The circumstances continue to be largely favourable for sustained, rapid and more inclusive growth of the economy.”

Prime Minister Manmohan Singh said last week that despite an adverse international environment India could sustain growth of about 8 percent in the fiscal year to end-March.

Private economists predict growth of around 7 percent, sharply lower than 9 percent in each of the last three years.

The slowing economy and job losses have come at a bad time for the Congress party-led federal government, which faces key electoral tests over the next few months leading to a nationwide poll early next year.

Inflation eased for two successive weeks in early November helped by lower fuel prices and slowing demand and now stands below 9 percent, adding to expectations the central bank would aggressively lower rates as growth falters.

The finance ministry report prepared for Monday’s conference said the economy was likely to slow this fiscal year but growth of 7-8 percent would still be among the best given the financial crisis and a slowdown in major export markets.

Chidambaram said the government may have to “revisit and revive” pending reforms and he hoped credit flows would improve by the end of November or December.

He added the government may need one more year to meet its revenue deficit target but fiscal consolidation remains a priority for the government.

Under the Fiscal Responsibility and Budget Management Act, the government was expected to eliminate the revenue deficit and limit the fiscal deficit to 3 percent of GDP by the end of the 2008/09 financial year.

But the government had set a lower deficit target of 2.5 percent of gross domestic product. However, heavy spending on schemes such as a debt write-off for millions of poor farmers and higher wages for government employees has threatened that.