The global financial meltdown is unlikely to affect the broader Indian economy, though there is a case for easing the interest rate regime to make more funds available for the country’s corporations, Suresh Tendulkar, chairman, Prime Minister’s Economic Advisory Council, said on Monday.
“With inflation showing signs of coming down, there could be some relaxation in interest rates,” Tendulkar told Hindustan Times.
The Reserve Bank of India (RBI) launched an all-round monetary attack on inflation by raising key interest and reserve rates.
After remaining above a worrisome 12 per cent during the past few weeks, inflation has shown signs of declining falling to 11.8 per cent in the last reported week.
The repo rate, the benchmark short-term lending rate, has been increased thrice since March 2007 and now stands at 9 per cent.
The RBI has cut the cash reserve ratio (the share of deposits banks have to park with the the RBI in cash) by another 1.5 percentage points last week in two tranches. Effective Saturday, the CRR would stand at 7.5 per cent, down from 9 per cent, releasing an additional Rs 60,000 crore into the banking system.
“It is a question of restoring confidence,” Tendulkar said.
He said Indian banks were “irrationally” affected by this crisis of confidence. “Indian banks are well capitalised and their exposure to complex derivative instruments are minimal,” he said.
The council headed by Tendulkar has projected that the Indian economy will growth by 7.7 per cent during 2008-09, down from the over 9 per cent growth recorded in the last three years.
The International Monetary Fund’s (IMF’s) World Economic Outlook (WEO) released last week projected that the country’s gross domestic product was likely to slow down to 7.9 per cent in 2008 and slide further to 6.9 per cent in the next year.
India’s economy expanded 7.9 per cent in the three-months ending June 30--the slowest since 2004 in the backdrop of high inflation and sluggish industrial growth on the back of high borrowing costs.