India Has Acted ‘Aggressively’ to Protect Economy, Bansal Says

The Reserve Bank of India has acted aggressively to protect the economy from the adverse impact of the global economic meltdown, junior finance minister Pawan Kumar Bansal said today.

The central bank slashed its overnight lending rate, or repurchase rate four times since mid-October, to a record low of 5.5 percent. It also reduced the reverse-repurchase rate twice to 4 percent. Industrial output shrank 2 percent in December from a year earlier, the most in almost 16 years. The statistics office said this month the economy may expand 7.1 percent in the year ending March 31, the slowest pace since 2003.

India’s central bank has “acted aggressively and pre- emptively on monetary policy accommodation,” Bansal said in a written reply to a question in parliament in New Delhi today.

The Reserve Bank of India also reduced the cash reserve ratio, or the amount of money lenders need to set aside to cover deposits, four times since mid-October to 5 percent, from 9 percent, freeing up cash at banks.

Since October, the government’s stimulus packages and interest-rate cuts by the central bank have added $75 billion, or 7 percent of GDP, to the economy, according to the central bank.

“The endeavor of the Reserve Bank of India has been to provide ample rupee liquidity, ensure comfortable dollar liquidity and maintain a monetary policy environment conducive for the continued flow of credit to productive sectors at reasonable cost,” Bansal said.

Stimulus, Deficit

The government on Feb. 24 lowered the excise duty to 8 percent from 10 percent, and reduced the service tax to 10 percent from 12 percent, to help revive demand and arrest the slide in factory output. The 4 percentage-point cut in central value added tax in December was extended beyond March 31.

India said on Feb. 16 that its budget deficit may widen to 6 percent of gross domestic product in the fiscal year ending March 31, more than double its target, or 3.26 trillion rupees ($65 billion).

The fiscal deficit including the liability on account of bonds issued to oil companies and fertilizer makers will be at 4.22 trillion rupees, Bansal said in response to a separate question.

“The perception of lack of credit availability may be attributed to reduced flow of funds from non-bank sources, notably the capital market and external commercial borrowings,” he said.