The Reserve Bank of India (RBI) might not resort to hiking interest rates as the first option to roll back their accommodative monetary policy, Prime Minister’s Economic Advisory Council Chairman C Rangarajan said on Wednesday.
“If inflationary pressures continue to mount, the first step is to hike policy rates, which RBI may not choose to do. Instead, it will stop further injecting liquidity by stopping Open Market Operations,” Rangarajan told reporters here.
He said the RBI is likely to continue with its current stance at least till the end of the current financial year to March, unless there is a dramatic rise in inflation. “I will say the central bank will watch inflation until November or December to take a call on rate changes.”
The Economic Advisory Council expects the headline inflation rate based on the wholesale price index (WPI) to rise in the coming months mainly on account of a low statistical base.
“By March, we estimate inflation rate to be between 5-6 per cent,” he said. India’s all-commodities WPI has risen nearly 6 per cent since the beginning of the current financial year in April. According to the latest data, WPI-based inflation was at 0.70 per cent in the week ended September 26.
Rangarajan said the government is likely to continue with the fiscal stimulus at least till the end of the current financial year to March.
“The stimulus that is already there was planned for the whole year, so it is unlikely that the same will be pulled back before March,” he said. To combat economic downturn, the government has provided various fiscal and monetary measures since December.
GDP growth
Rangarajan said India’s gross domestic product (GDP) is likely to grow between 6.0-6.5 per cent in the current financial year ending March.
“There is hope that there will be revival in the global economy and by third quarter (October-December) things will change. It means we might gain from the global economic environment in the second half (October-March) of the current financial year,” he said.
The PM panel head expects industrial production to grow 8 per cent during the current fiscal. “Even if we discount the base effect in the August index for industrial production (IIP), there has been a substantial growth,” Rangarajan said.
India’s IIP rose to a 22-month high of 10.4 per cent in August. This was the first time since October 2007 IIP has grown in double digits in a month.
On the other hand, he said, agriculture GDP is likely to decline by 2.0-2.5 per cent in the current year. “There has been a decline in Kharif output but there is no reason to assume that Rabi crop will be low. In fact it may be better than the last year. I expect it to be slightly higher,” he said.
Fiscal Deficit
The Indian economy cannot sustain the current level of high fiscal deficit, Rangarajan said.
“If the government continues at the same level of fiscal deficit, it will become a problem by next year,” he said.
Rangarajan said the current account deficit in the financial year to March is likely to be close to 2 per cent of GDP, while the trade deficit in absolute terms may be the same as last year.
About meeting the Fiscal Responsibility and Budget Management (FRBM) Act, he said “It is difficult to achieve. The government needs to make a plan towards it. It will probably take more than three years to get back to FRBM.” As per the FRBM Act, India was to reduce the fiscal deficit to 3.0 per cent of GDP in 2008-09. However, the government ended last year with a fiscal gap of 6.2 per cent of GDP due to higher spending and deceleration in revenues, as it cut taxes to boost demand.
In the Budget for 2009-10, Finance Minister Pranab Mukherjee had said India “will return to FRBM target for fiscal deficit at the earliest as soon as the negative effects of the global crisis on the Indian economy have been overcome.”
He said the country’s foreign exchange reserves are likely to rise around $25-30 billion by March on the back of robust inflows.
