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RBI's recipe to avert rating downgrade

August 16, 2012 19:54 IST

Reserve Bank on Thursday said the possibility of India's sovereign rating downgrade by global agencies like Moody's and Fitch can be averted by improvement in government finances.

Fiscal consolidation, said RBI Deputy Governor Subir Gokarn, will also help in moderating inflation and lowering interest rates.

"The best way to prevent it (ratings downgrade) would be to put in place a sustainable process of fiscal consolidation because that is the most important parameter, indicator on which that risk or threat has manifested. If we can do that reduction...That risk is averted", he told reporters here.

Global agencies including Moody's and Fitch have warned of a sovereign rating downgrade. They have earlier lowered the outlook, giving indications of a possible rating downgrade.

The downgrade threat comes in the backdrop of growth slowing to a nine-year low of 5.3 per cent in the fourth quarter of 2011-12 and persisting high inflation.

Finance Minister P Chidambaram has sought assistance from experts --Vijay Kelkar, Indira Rajaraman and Sanjiv Misra-- to prepare a road for fiscal consolidation. The Centre's fiscal deficit has risen to 5.76 per cent of GDP in 2011-12.

Gokarn said steps like removing supply side constraints to bring down food inflation, FDI policy initiatives and encouraging foreign fund inflow would help in boosting growth.

"...So these are the things which will help stimulate growth without putting pressure on inflation," he added.

The statement comes a day after, Prime Minister Manmohan Singh has expressed optimism that India's GDP growth this fiscal would be over 6.5 per cent achieved in 2011-12.

The Prime Minister's Economic Advisory Council (PMEAC) will come out with mid-year economic outlook tomorrow.

The RBI had lowered its GDP growth forecast to 6.5 per cent for 2012-13 from its earlier estimate of 7.3 per cent.

On decline in WPI-inflation to 6.87 per cent in July, he said it is a "welcome reduction", but the increase in the core (manufactured) inflation
continues to be a matter of concern.

"...Internal dynamics are moving in opposite directions. Fuel inflation was relatively low for July... Food inflation is still high. Now we have the (deficient) monsoon that might have an impact," the top RBI official said.

On rising crude prices in the international market, Gokarn said "it is another risk or another pressure point that has emerged on inflationary situation".

He said easing of crude oil prices was providing "some relief" on inflation front, but now they have gone back to about $115 a barrel.

On interest rate cut, he said the RBI would take inputs from the April-June 2012 GDP numbers, August inflation data and other economic indicators which would be released between now and September 17 when it reviews the monetary
policy.

As regards liquidity situation, Gokarn said that it has been "quite within our comfort zone for quite some time... overall no concerns on liquidity front".

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