The Telegraph
Friday , June 1 , 2012
Since 1st March, 1999
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Growth ill calls for policy pill
Case for Reserve Bank rate cut

Mumbai, May 31: The dismal GDP growth number of 5.3 per cent for the fourth quarter of 2011-12 may prompt a hesitant Reserve Bank to bring down interest rates next month.

The RBI is set to undertake a mid-quarter review of the monetary policy on June 18.

In its annual monetary policy last month, the central bank had brought down the repo rate by 50 basis points to 8 per cent.

It had said the space for further reduction in policy rates was limited as the deviation in the growth trend was modest and upside risks to inflation persisted.

The repo is the rate at which the RBI provides liquidity to banks.

However, a section of economists feel that the dismal GDP figure released today could prompt the apex bank to bring down interest rates next month.

Speaking to The Telegraph, Upasna Bhardwaj, chief economist of ING Vysya Bank, said the RBI could bring down the repo rate by 25 basis points.

The final decision will depend on inflation and industrial production data, she added.

Robert Prior-Wandesforde, director (Asian economics) at Credit Suisse, also felt that the RBI would resort to a rate cut.

However, there are others who are more cautious in their views, and they point out that the RBI will continue to lay stress on inflation in the immediate term.

According to Madhavi Arora, analyst at Karvy Stock Broking, the RBI may take a “wait and watch” stance in June policy meeting.

Rating fear

Economists fear that the poor GDP numbers will increase the risk of a sovereign rating downgrade unless the Centre takes urgent measures to restore confidence.

Last month, Standard & Poor’s (S&P) cut India’s outlook to negative from stable, though it retained the BBB- rating, which is the lowest investment grade.

“Our rating (sovereign) may be jeopardised. The government should take proactive steps. Foremost amongst them is fiscal consolidation and subsidy rationalisation. It should also try to remove bottlenecks in investment,” Rupa Rege Nitsure, chief economist at Bank of Baroda, said.

Meanwhile, HSBC today termed India as a “gasping elephant” as the slowdown in economic growth is “deepening” and the downside risks to the outlook have increased.

In a research note, HSBC said the slowdown in growth has proven deeper than expected and blamed administrative obstacles and policy paralysis.