INDIA AND FISCAL POLICY

RBI URGES GOVT TO CUT EXPENDITURE

Reuters

The Times of India, August 24, 2012

MUMBAI: The Reserve Bank of India (RBI) said on Thursday that fighting inflation remained the cornerstone of its monetary policy, and urged the government to cut expenditure, indicating it was unlikely to act soon to ease rates despite slowing growth.

The RBI said poor summer rains had further clouded growth prospects for Asia's third largest economy, but the key was to cut government subsidies and revive capital spending.

"Such an action would also provide some space for monetary policy, but, importantly, lower interest rates alone are unlikely to jumpstart the investment cycle," the RBI said in its annual report.

The report, which is released at the end of the central bank's accounting year, is a review of the previous fiscal year's macroeconomic conditions and outlook for the current year.

The country's growth skidded to a nine-year low of 5.3% in the March quarter, and many economists have slashed their 2012-13 forecast to around 5.5%, lower than the RBI's downwardly revised projection of 6.5%.

Inflation, which had stayed well above 7% for two and half years, has eased, with both the wholesale price index and the consumer price index slowing, although food prices rose. But the RBI, which left its key repo rate steady at 8% last month, said a close vigil on prices would be necessary for the rest of the year to prevent re-emergence of inflationary pressures.

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