Date:05/12/2008 URL: http://www.thehindu.com/2008/12/05/stories/2008120561341600.htm

National

Impact of global meltdown stronger on India: Subbarao

Special Correspondent

The challenge is to ensure balance between inflation and growth

Wholesale, consumer price indices need to be watched
Fiscal policy is an important instrument to stimulate demand

HYDERABAD: The impact of global financial crisis on India is stronger than expected but it will be the first to recover, according to D. Subbarao, Reserve Bank of India Governor.

“Though the country is not directly impacted by the global financial crisis, we have not weathered the indirect knock-on effect of the global crisis. And because the global crisis is turning out to be deeper and longer than we had earlier expected, the impact on India is also turning out to be stronger (than expected).”

Talking to reporters after participating in a seminar on “Mitigating spill-overs and contagion — lessons from the global financial crisis” here on Thursday, Mr. Subbarao said the inflation rate would further decline. The challenge before the central bank was to ensure a balance between inflation and growth. While the inflation rate was falling in the last three weeks, there was a moderation in growth. The RBI had shifted its monitory policy stance and adjusted the rates in the last two months. The Wholesale Price Index and the Consumer Price Index need to be watched.

The apex bank initiated measures to maintain a comfortable liquidity of rupee and foreign exchange, besides ensuring continuous credit flow to productive sectors, exports and small and medium enterprises (SMEs). “I think the measures taken by the Government and the RBI have resulted in positive outcomes.”

Asked as to why some private banks were not reducing their lending rates, Mr. Subbarao said the central bank could only signal policy rates, but it could not issue mandates to the banks on their rates. “Rate cut was not the only solution to stimulate demand, though important. The fiscal policy is an important instrument to stimulate demand. The Government and the RBI are doing whatever is appropriate and necessary,” he said. He said that the RBI initiated a number of measures to address the pressure on mutual funds and non-banking finance companies (NBFCs). A special window was opened to enable banks to access money for lending which was of the order of Rs. 60,000 crore.