Dismal industrial output may not prompt the Reserve Bank of India (RBI) to cut rates soon, prime minister’s economic advisory council chairman C Rangarajan said Monday even as he forecast the rupee to stabilise at around R 55 to a dollar.
“Industrial output is weak and core inflation is coming down. But we need to watch for some more time. There is still some time for RBI to take a decision,” Rangarajan said when asked if weak growth prospects and moderation in inflation increases chances for rate cuts in near term.
After cutting rates by 50 bps in April, RBI has left rates unchanged but lowered statutory liquidity ratio by 100 basis points to 23% in July and cut cash reserve ratio by 50 bps in two steps between September and October.
Last week, the economic gloom was compounded after government data showed the index of industrial production fell 0.4% in September, exports declined by 1.6% in October and 2G auction fetched just R 9,400 crore as against the target of R 40,000 crore.
Slower growth prospects and a worsening of fiscal situation weakened investor sentiments and led to a sharp depreciation in the rupee. The local currency had appreciated to R 51.75 to a dollar in early October but started sliding since then and touched R55.16 last Friday.
“The rupee will stabilise at this level,” Rangarajan told reporters after a conference organised by Exim Bank.
Although weaker currency unduly widens the trade and current account deficits by making imports costlier, Rangarajan said “the capital inflows are adequate to fund the current account deficit.”
Supporting globalisation of financial market, the former RBI governor said the capital flows have done more good than bad to emerging market economies like India. “However, we need to be watchful. Capital inflows have not been even and that's why there is a pressure on the exchange rate,” he said.
The PMEAC chairman also quelled fears of a widening of fiscal deficit due to the failed 2G spectrum auction saying “our attempt will be to remain as close to the indicated target” of 5.3% of GDP.
While the UPA government has announced a slew of reforms since September including moving ahead with bills on insurance, pension and banking, the opposition parties and allies like Trinamool Congress have made it clear that they will oppose the legislations in parliament.
“All attempt will be made to see the necessary legislations are passed,” Rangarajan said.