Arvind Subramanian sees case for RBI rate cut

Citing low inflation and under control fiscal deficit, Chief Economic Advisor Arvind Subramanian on Tuesday pitched for a rate cut by the Reserve Bank at its monetary policy review meeting next week. He also said that India needs to take action to keep its currency competitive in view of aggressive rate cut policy of China and other countries.

"Looking at the analysis of what is the inflation forecast, what is the fiscal consolidation, what is the international environment...and how monetary policy should respond, I think there is scope for monetary easing," he told reporters here.

The Reserve Bank is slated to announce its second bi- monthly policy on June 2 during which the central bank will take a call on interest rate taking into account inflation and other economic parameters. "Inflation...is going to be lower than the RBI's target.

Fiscal policy is supportive and that (will have) implications for interest rates going forward," Subramanian said. Citing China's example, he said the country is buying dollars to build reserves and cutting its interest rates aggressively to make its currency more competitive and promote growth.

"It is not that everything that China does should be imitated but that's a lesson we need to learn from... Remember China is now cutting interest rates quite aggressively to respond to its growth slowdown and that's going to make its currency more competitive...

So we need to respond accordingly," he said. Moreover, he added, most of the countries are trying to keep their currencies competitive and cheap. He said: "The question is how should we respond. We should take defensive action and we should not allow this to impact on our show.

Very least we should not allow our currency to become more uncompetitive.

"We should keep it (rupee) competitive if we want Make in India to be a long-term success. We have to have a very supportive currency policy."

Since January, RBI has cut policy rate by 0.50 per cent to 7.5 per cent as it inflationary pressures eased.

The WPI inflation fell to a record low of (-)2.7 per cent and retail inflation below 5 per cent in April. Last week, Finance Minister Arun Jaitley too had indicated that he would favour a rate cut by the RBI. When asked if it was time for RBI to cut interest rate in view of moderation in inflation, Jaitley replied: "My views are well-known. It is (time)".