The Reserve Bank can ease interest rates further if inflation and current account deficit come down, asserted Governor D Subbarao and said today's 0.25 per cent rate cut was prompted by decelerating growth.
"If inflation moderates further, CAD moderates further, there will be more room for monetary policy easing but if they go along the currently expected lines, the space for monetary policy easing is quite limited," Subbarao told reporters at the customary post policy interaction at RBI headquarters.
Shedding its nine-month long hawkish stance, RBI today reduced the key interest rate by 0.25 per cent and decided to inject Rs 18,000 crore liquidity into the system.
"The main consideration for us to ease today was that growth had decelerated," Subbarao told reporters at the customary post policy interaction at RBI headquarters.
He, however, added that the RBI believes the slowdown in growth -- which stood at 5.4 per cent for the first half of FY'13 -- has hit the bottom and would only go up from here on.
"We were trying to balance growth and inflation considerations and growth has decelerated to the lowest in nine years," he said.
Today's repo rate cut came after nine months of holding on to elevated rates due to inflation and the widening fiscal deficit.
On the fiscal deficit, Subbarao said the Reserve Bank was going by the commitments of discipline, made by Finance Minister P Chidambaram in investor road shows in recent past.
The governor, however, focused a lot of attention on the widening current account deficit, calling it as "by far the biggest risk for inflation and for macroeconomic management".
He gave an explicit guidance on the monetary policy stance, saying further easing depends on a significant decline in CAD and inflation, which would be more than RBI's expectations.
Subbarao, however, did not specify a fiscal-end RBI estimate on CAD like it does on growth and inflation.
On inflation, he said the number will start going up post March on base effect and the impact of fuel price increases.
In his policy statement released this morning, Subbarao had said the decline in headline inflation provides a limited space for the monetary policy to give a greater emphasis to the growth risks.
At the interaction, Subbarao rejected the criticism that the apex bank took a divergent stance in the 'Macroeconomic and Monetary Developments' report released on the eve of the policy review and the policy document.
"I read them quite consistently...if you read any inconsistency there, that was not deliberate," he said.
"The message we are trying to give is that as much as there is some space, its going to be limited and we are going to use it with a lot of judgement on both the timing and the quantum," Subbarao said.
Subbarao said that consumption, "the last bastion" in the growth story, has also started crumbling down. "But it will get revived only when people see their incomes going up and not through rate cuts", he added.
"The marginal propensity to consume out of a reduction in interest rate is lower than the marginal propensity to consume out of an increase in income," the governor said.
In the policy statement, the RBI nudged banks to grant more credit to the productive sectors on reservations from the small and medium enterprises and agriculture sectors, who are not given credit, he said.
Deputy Governor K C Chakrabarty said the large amount of restructuring, being witnessed by some banks, was a matter of concern but justified a cautious use of the instrument by lenders given the difficult economic climate.
On new bank licences, Subbarao said, "We are in the final lap", but declined to give any specific details.
"We consulted the government...They have made certain points to which we have responded and I don't know how many iterations it might go through but now we are awaiting the government's response to that. Both the government and Reserve Bank will want to launch this as soon as possible," he said.