New Delhi: The Reserve Bank of India may find it difficult to cut key policy rates further if inflation continues to remain elevated, even as India's contracted industrial output in March points towards a slowing economy, Prime Minister's Economic Advisory Council Chairman C Rangarajan said Friday.
"If inflation continues to persist at a very high level and doesn't show any sign of decline, then the monetary authority (RBI) has a very very difficult choice to make," Rangarajan told CNBC TV18 in an interview after the release of government data on index of industrial production (IIP).
Earlier today, India posted a "very disappointing" industrial production figure, showing a contraction of 3.5% on-year in March against the 4.1% growth recorded in the previous month, on account of a fall in output in manufacturing, capital goods and mining sectors, government data showed.
However, if inflation shows signs of decline in the coming weeks or months then the central bank will have "greater manoeuvrability" for a policy rate cut, Rangarajan added.
Earlier Tuesday, RBI Deputy Governor Subir Gokarn said that the central bank has limited room for a further policy rate cut, as high crude oil prices continue to pose risks to inflation both in the medium- to long-term, reiterating the central bank's last stance and sending fears that high interest rate will likely slow India's economic recovery.
Further, India's widening current account deficit, which may have risen to 3.6% of the gross domestic product (GDP) in the fiscal year 2011-12 from 2.6% a year ago, according to the Prime Minister's Economic Advisory Council, may limit the RBI's scope to go for aggressive rate cuts.
India's wholesale price index (WPI) rose 6.89% on-year in March marginally slower than the 6.95% yearly rise recorded in February, but is still higher than the RBI's comfort level of 5%-6%. Besides, retail prices are high as per the RBI's own admission.
On April 16, the RBI cut its key policy rate by a higher-than-expected 50 basis points for the first time since 2009 to support India's faltering economic growth, but warned of limited scope for further reduction in rate cuts owing to upside risks to inflation from incomplete pass-through of high crude oil prices.
Earlier, the RBI had raised key interest rate, or repo rate, by 375 basis points in 13 sequential steps between March 2010 and October 2011 to tame stubbornly high inflation until it pressed the pause button on rate hikes in its December 16 mid-quarterly monetary policy review to address concerns about deteriorating economic growth.
India's economic growth probably faltered to a three-year low of 6.9% in fiscal 2011-12. However, the RBI expects economic growth to pick up in the current fiscal on likely turnaround of industrial production. The central bank has pegged the country's gross domestic product (GDP) to grow at 7.3% in this fiscal.