India cbank says sustained fiscal consolidation needed for monetary easing

Last Updated: Mon, Jan 28, 2013 11:40 hrs

MUMBAI, Jan 28 (Reuters) - India's central bank said a sustained commitment to contain fiscal and current account deficits was needed to create room for monetary easing, a day before it is widely expected to cut interest rates for the first time since April.

While the near-term risks to a bloating fiscal deficit have waned following the government's recent policies to stick to its fiscal deficit target of 5.3 percent of GDP, sustainable fiscal consolidation would require cuts in subsidies.

"As reforms get executed, monetary policy could increasingly focus on growth revival," the Reserve Bank of India said in its quarterly report on macroeconomic and monetary developments on Monday.

The Reserve Bank of India added that even if inflation recedes further, the wide current account deficit may slow the pace of monetary policy easing. The current account gap had touched a record high of 5.4 percent in July-September and is likely to rise further in the December quarter, it said.

The RBI also said its survey of professional forecasters had lowered the growth forecast for the 2012/13 fiscal year ending March to 5.5 percent from 5.7 percent previously. In October, the central bank lowered its own forecast for 2012/13 growth to 5.8 percent from 6.5 percent.

The survey also revised down the average wholesale price index inflation forecast to 7.5 percent from 7.7 percent. In October, the RBI had forecast that inflation would be running at 7.5 percent by March, though December's rate of 7.18 percent was the lowest in three years and better than the bank had expected.

The RBI is expected to reduce the policy repo rate by 25 basis points to 7.75 percent in a policy review on Tuesday, making its first cut in nine months, economists polled by Reuters said earlier this month. (Reporting by Suvashree Dey Choudhury and Aradhana Aravindan)

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