RBI sees little room for lowering rates further

“We started that process (reducing interest rates) in April. But if you look at our inflation projections in relation to what we consider as long-term or medium objective,there are inflation pressures. That,in a sense,limits the room that we have to reduce rates,” he said at a Ficci meeting in Hyderabad.

He said that although growth and inflation balances are shifting favourably,the RBI sees inflationary pressure in the medium and long term. “As we said in policy guidance,while the growth and inflation balance is now shifting favourably,that (though) growth is slowing down,inflation is also coming down along with it. That allows us (RBI) some room to reduce policy rates,” he said.

The RBI is conscious of the extreme volatility in the rupee and has a variety of tools to guard against such fluctuations,he said,just days after the RBI took measures to bolster foreign currency inflows. “The ultimate determinant on what the exchange rate is going to be,is going to be how much capital comes in,in a way that finances the current account deficit and also the extent to which we reduce the current account deficit because that’s really the fundamental driver of the currency,” Gokarn said.

After a gap of three years,the RBI last month slashed short term-lending rate by 0.50 percentage points to 8 per cent. In March,it slashed CRR — the portion of deposits banks are required to keep with the central bank — by 0.75 percentage points to 4.75 per cent,a step that infused Rs 48,000 crore into the economy. On the rupee fluctuation,Gokarn said there may be some speculative opportunities and RBI is taking necessary steps to curb that. “I would not give any projections on when anything happens. It is very very fluid situation…,” he said.