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RBI’s turn to spur economy: Moody’s

Special Correspondent

Growth can decline sharply to around 6.1 % in Q3

NEW DELHI: Moody’s on Wednesday viewed that the Reserve Bank of India (RBI) would now have to step in to revive the India economy as repeated tax cuts would not only worsen the fiscal situation but also weaken investor confidence.

Projecting a further decline in the country’s GDP (Gross Domestic Product) growth to 6.1 per cent for the October-December quarter this fiscal, the data for which is expected to be released on February 27, Moody’s group entity Moody’s Economy.com said: “India’s growth momentum is easing, and the policymakers must act to support the economy. However, given the government is cash strapped, it is time for the RBI to join in again in reviving the economy.”

In a statement here, Moody’s noted that the RBI was expected to further prune its repo rate to four per cent in the short-term from the prevailing level of 5.5 per cent so as to make cheaper funds available to banks for onward lending in keeping with the marked deceleration in the inflation rate in recent weeks.

“Compared with the government, the central bank certainly has more room to exercise its policy tools. For growth to remain strong, the central bank needs to ensure ample liquidity and low interest rates,” it said.

Noting that the impact of the policy measures taken to revitalise the economy would not be reflected before the next fiscal, Moody’s pointed out that growth during the third quarter of 2008-09 could decline sharply to around 6.1 per cent. Moreover, it projected a further slowdown during the January-March quarter which would take the GDP growth for the entire fiscal lower at around 6.8 per cent as compared to the official estimates pegged at 7.1 per cent.

As for the stimulus package announced by the government by way of cut in excise duty and service tax, the statement noted that while it would provide the much-needed support to combat the economic slowdown, “they may heighten concerns about the country’s already large public debt. The fiscal deficit is set to end up much larger than the official projection,” it said.

Besides, the alarming fiscal position would put upward pressure on funding costs. “Investor confidence, which has already been hurt by the global financial turmoil, is set to further weaken as the government struggles to manage the fiscal imbalance. Investment growth is set to slow notably this year.

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