Reserve Bank of India Governor Shaktikanta Das, on Thursday, said there is room for rate cut as the growth has slowed down. “The policy objective of the monetary policy is to maintain price stability, keeping in mind the objective of growth.
“Therefore, today, when we see that price stability is maintained and our inflation is well below 4 per cent and expected to be so in the next 12 months horizon, there is room for rate cut, especially when the growth has slowed down,” Das said in a question and answer session at Bloomberg’s India Economic Forum.
In its last monetary policy review, the RBI reduced the policy repo rate under the liquidity adjustment facility (LAF) by 35 basis points (bps) from 5.75 per cent to 5.40 per cent. Since the beginning of 2019, the central bank has cut the repo rate by 110 basis points to support flagging growth.
US Fed rate cut
To a question on the impact of the latest round of US Fed rate cut, the Governor explained that from the Indian point of view, any cut in the interest rates would mean better flows into the emerging markets, and India is one of the most attractive destinations for foreign portfolio investors and others.
“I think this should lead to inflows of funds into India by way of FPI as well as to some extent FDI.
“But while we welcome this, at the same same time, as a regulator, we have to be very careful about monitoring this inflow and focussing simultaneously on the possible spillover effects at a later date and to avoid any situation where there is an asset build-up,” he said.
So, RBI has to have twin kind of focus – to enable inflow of the funds and also to keep a watch over the possible adverse effects during the reverse flow of these funds.
Limited fiscal space
On the fiscal side, the Governor said the government has by and large remained prudent. They have not announced any sort of counter-cyclical measures in terms of going in for fiscal expansion or anything of that sort. They have taken certain administrative and regulatory measures with regard to automobile and export sector and prior to that for the banking sector.
“I think the government’s fiscal space itself is limited….If the government makes an assessment that counter-cyclical fiscal expansion is required, it is for it to decide. But at the moment, as I would see, there is little space for any fiscal expansion.
“I think it is very important to do policy changes focussing on improving the ease of doing business, certain structural reforms. The huge amount of resources provided in the Budget...it is very important to see that they are spent fruitfully. For example, the capital expenditure can be front loaded. And I think the government is already focussing on that,” said Das.