News and Events

Rate cut will stimulate growth

Reduction of 50 basis points in repurchase (repo) rate by the Reserve Bank of India (RBI) would stimulate growth and put the economy back on rail, Planning Commission Deputy Chairman Montek Singh Ahluwalia said Tuesday.

By lowering the repo rate, the (RBI) governor has given a signal that the economy is ready to be given a stimulus for growth without danger on the inflation front," Ahluwalia told reporters on the margins of an event here.

In its credit policy for this fiscal (2012-13) earlier in the day, the central bank reduced the repo rate to eight percent from 8.50 percent, which in turn, will drop the reverse repo rate to seven percent from 7.5 percent.

The repo rate is the interest the RBI levies on short-term borrowings by commercial banks. The reverse repo rate is the interest on short-term lending. A cut in these rates rate reduces the cost of accessing funds for lending institutions.

"The RBI is satisfied that inflationary pressures are no longer the principal thing to worry about. There are many more things we need to do to restore growth. It's a good way to start the year (fiscal) as it will put the economy back on high growth path," Ahluwalia said after unveiling here the multi-skill development centre, set up by the labour and employment ministry.

Noting that higher headline inflation rate was a matter of concern giving no scope for complacency, he said the central bank's decision to lower the repo rate also signified that it (inflation) was declining.

"I would certainly like the headline inflation to come down further though we cannot wait till it falls to very low level just as we tighten up in anticipation that things may worsen. Policies should be adjusted as things move and I think that's what they (RBI) have done," Ahluwalia observed.

The headline inflation or the wholesale price index (WPI) declined marginally to 6.89 in March from 6.95 per cent in February though food prices rose 9.94 percent on year in March as against a 6.07 rise in the previous month (February).

Commenting on the central bank's estimate of the gross domestic product (GDP) growing at 7.3 percent in this fiscal, Ahluwalia said for the economy to grow at 7.3 percent, a lot of things have to be done to get investment projects moving.

"I believe that implementation difficulties, which were holding up many investment projects are being overcome. For instance, Coal India Ltd is set to sign fuel supply agreements with power producers," he added.