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“There is room for monetary easing, but that room is limited and we have to make a careful judgment on how to use that limited room,” he said at a briefing in Moscow today, reiterating guidance he gave in January. Subbarao, who is attending Group of 20 meetings in the Russian capital, estimated economic expansion of 5.5 per cent for the 12 months through March 2013, above the Central Statistics Office projection of five per cent.
The country last month became the first major Asian nation to cut interest rates this year after benchmark inflation eased, as the central bank moved to back government efforts to boost the economy. Finance Minister P Chidambaram, who unveils the annual Budget on February 28, has vowed spending curbs to help reduce the chance of a resurgence in price pressures.
The improvement in economic growth “is going to be gradual, the improvement will depend on the number of factors, but I believe that largely perhaps, the worst is behind us,” Subbarao said.
The governor said he would assess the quality of the government’s fiscal adjustment. The Reserve Bank in a January 28 report indicated a push to pare the deficit that increasingly relies on sales of shares in state-owned companies and one-off auctions of telecom permits may be unsustainable.
The central bank lowered the repurchase rate to 7.75 per cent from eight per cent on January 29. At the same time, Subbarao said while there’s space to ease monetary policy, “it’s going to be quite limited.”
Among the constraints is a deficit in the current account, the broadest measure of trade, which swelled to a record $22.31 billion in the quarter ended September 30. This financial year’s gap will be higher than last year, Subbarao said, adding the depreciation of the rupee isn’t helping exports in the short term.
Deficit widened
The shortfall has weighed on the rupee, which has fallen more than 8.5 per cent against the dollar in the past year. The currency declined 0.5 per cent yesterday to 54.2250, completing its biggest weekly loss since November, as provisional data showed the trade deficit widened in January to a near record.
Prime Minister Manmohan Singh has changed policies since mid-September, seeking to revive investment after corruption allegations against officials and parliamentary gridlock hurt his development agenda.
The steps included opening retail and aviation to more foreign participation, easing caps on capital inflows and setting up a panel to speed up infrastructure projects. The government also partially freed diesel prices from state control last month to limit fuel subsidies.
Finance Minister Chidambaram has vowed to contain the fiscal deficit at 5.3 per cent of gross domestic product in 2012-2013 and pare it to 4.8 per cent the following year, seeking to lower the odds of a credit-rating downgrade.
Electricity prices
Recent reports showed wholesale prices rose 6.62 per cent in January from a year earlier, the slowest in 38 months. That pace remains above the central bank’s five per cent comfort zone.
A separate measure of inflation based on consumer prices reached 10.79 per cent in January, one of the highest levels in the Group of 20 major economies.
Increases in coal and electricity prices may add to inflation, Subbarao said.
The economy would expand five per cent in fiscal year through March 2013, below last year’s 6.2 per cent and the least since four percent in 2002-2003, the Central Statistical Office estimated February 7.
The International Monetary Fund forecasts a six per cent GDP growth for the country in the 12 months beginning April 2013, compared with an annual average of about eight per cent in the past decade.
