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Inflation moderating, RBI might not hold rates for long: Mayaram

Finance Secretary Arvind Mayaram on Thursday said greenshoots of recovery are visible with the economy expected to grow by 5.8 per cent this year, and inflation likely to moderate further, giving room to the Reserve Bank of India (RBI) to soften interest rates. He ruled out  an immediate review of curbs on gold import.

“Although RBI has projected 5.5 per cent growth this year, I’m confident we will achieve close to 5.8 per cent growth. The Budget has very strong growth impulses,” Mayaram said at an Assocham event.

He said despite a deficient monsoon, measures taken by the government to ease food prices had helped bring down inflation and the trend was likely to continue in the coming months.

“RBI, in its recent credit policy statement, stated that the central bank will not hold interest rates higher than is necessary any longer, and if disinflation proceeds as warranted, there will eventually be room to cut rates. Hope we reach that threshold very soon,” the finance secretary added.

Retail inflation, measured by the consumer price index (CPI), rose to 7.96 per cent in July from 7.46 per cent in June but remained below the target of eight per cent set  by the RBI by January 2015. However, RBI has another target as well— to bring CPI  inflation down to six per cent by January 2016. A report from the central bank on Thursday said there were upside risks to its January 2016 target.

The wholesale price index-based inflation declined to 5.19 per cent in July from 5.43 per cent in June.

India’s economy grew by 4.7 per cent in 2013-14 financial year—a sub-five per cent growth for second year in a row. Giving reasons for his gross domestic product (GDP) growth projections of 5.8 per cent, Mayaram said there was a pick-up in manufacturing with industrial output expanding at 3.5 per cent during April-June and car sales growing for the third month in a row by 7.1 per cent year-on-year in July.

Demand has also gone up for cement, indicating a pick-up in construction activity. HSBC’s Purchasing Managers Index rose to 53 in July from 51.5 in June, signaling expansion in new orders.

The Economic Survey has pegged  the economic growth at 5.4-5.9 per cent, but said  it would  likely to be on the lower side of the  range. Mayaram, in a sense, sounded more optimist than the Survey.

“If we don’t go by month-to-month variation and instead look at trend growth then we see there are green-shoots of recovery,” Mayaram said, and added the fiscal deficit target of 4.1 per cent of GDP this year would also be met despite being a “tough task”.

He argued with softening of oil prices, diesel subsidy would be wiped out soon. “I think we will be able to exit the diesel subsidy soon enough and diesel is going to become market price.”

Mayaram said the current account deficit (CAD) would be contained below 2.5 per cent of GDP this year.

CAD was restricted to 1.7 per cent of GDP last year, as a result of gold curbs put in by the government, including a rise in gold import duty to the 10 per cent and making it mandatory for traders to export a fifth of all bullion import.

Asked whether the curbs would be eased, the finance secretary ruled out an immediate review. He said, “Perhaps at some point when we are more comfortable, when you start earning more from other exports, then maybe we can import more gold… 80:20 (gold import scheme) has worked very well till now. I don’t think we need to look at this at this point of time.”

On HDFC Bank’s proposal to raise its foreign direct investment limit, he said the government would decide shortly. Late last year, HDFC Bank had approached the Foreign Investment and Promotion Board for increasing the foreign holding in the bank to 67.55 per cent from 49 per cent. If the proposal of the bank  is accepted, it would exceed the cap of 74 per cent, after taking into account parent HDFC Ltd’s stake.


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