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High interest rate is not the only reason for economic slowdown, the Reserve Bank of India Deputy Governor K. C. Chakrabarty has said. He also reiterated that inflation would have to fall further for interest rates to be eased.
Addressing a banking seminar, organised by industry chamber Assocham, he said, “Low interest rates will not come automatically, unless the inflation is (also) low.” Trade deficit, he said, can be tackled only if core inflation is brought down to 1 per cent.” Core inflation is currently running at 5 per cent.
His remarks assume significance in the backdrop of the widening rift between the Finance Ministry and the RBI over the issue of reducing lending rates.
There’s a feeling within the Government and industry circles that RBI’s refusal to cut rates has been one of the reasons for slower growth. Since a 50 basis point repo rate cut in April, the central bank has stayed put on interest rates, citing inflationary concerns. However, in its October 30 policy, the central bank had hinted at monetary easing in the January-March quarter. “Agriculture is contributing only 15 per cent of GDP, but employs 70 per cent of the people. Banks must help SMEs and also in mechanising the agriculture sector. More resources will then be available for commercial purposes,” Chakrabarty remarked.
Talking about growth, the Deputy Governor said, “What are the problems to growth? One is inflation, two is the fiscal deficit, and three is the current account deficit.” For tackling these, a major role has to be played by the manufacturing sector, he said. A smooth macroeconomic environment is also required to push up growth, he added.
The fiscal deficit has been revised upwards to 5.3 per cent of GDP from 5.1 per cent. At the same time, it is projected that the current account deficit will be 3.7 per cent of GDP. Inflation based on Wholesale Price Index has dipped to a nine-month low of 7.45 per cent in October after staying above the 7.50 per cent level for eight straight months.
> Shishir.Sinha@thehindu.co.in
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