The government on Tuesday indicated that lending rates could be eased further to spur demand for goods and investment by companies to pull up the economy from a slowdown.
“There is a considerable scope for monetary policy easing over the next six to 12 months to offset the global increase in demand for money that is being transmitted to India,” the Mid-Year Review of the economy presented to Parliament said.
“An aggressive monetary policy may be necessary if the global economic depression continues to adversely affect manufacturing," the review said.
A slew of fresh monetary and fiscal measures, including steps that could allow banks to reduce lending rates further, are expected this week in a second dose of stimulus for the economy.
A cut in the RBI's benchmark repo rate—the rate at which the central bank lends to commercial banks— now appears a distinct possibility. Since September, RBI has cut the repo rate by 2.5 percentage points to 6.5 per cent.
“A pro-active monetary policy may be necessary if the global economic depression continues to adversely affect manufacturing, “ the review said.
Tax cuts and increased spending in the first round of fiscal stimulus to revive growth could raise the fiscal deficit. Chief Economic Adviser Arvind Virmani said the Centre’s deficit will increase to at least 5 per cent of GDP this fiscal due to the stimulus package.
“We already have a very substantial stimulus package this year... Two per cent is the fiscal deficit expansion,” Virmani said.
Stung by shrinking world demand, the country’s exports contracted by a worrisome 12 per cent in October and factory output plunged by (-) 0.4 per cent, the first contraction in 15 years.