New Delhi: The Reserve Bank of India will find it difficult to cut key policy rate further if inflation continues to remain sticky, Chief Economic Advisor to the Prime Minister C Rangarajan said Thursday, even as the country's economy in the fourth quarter (Jan-Mar) grew at a nine-year low of 5.3%.
"If you have a situation in which prices continues to remain sticky and do not come down then it will be more difficult for the Reserve Bank to ease the situation," Rangarajan told CNBC TV18 in an interview after the release of gross domestic product (GDP) data.
In April, the RBI surprised markets by slashing the repo rate -- short term lending rate -- by a hefty 50 basis, for the first time in three years, to spur India's faltering economic growth, but warned that scope for further rate cuts may be limited due to upside risks to inflation emanating from incomplete pass-through of high crude oil prices.
"Only if the inflation numbers, particularly non food manufacturing, show definite signs of decline, the monetary authorities will have the space to ease the policy... The stance can be towards growth, but certainly any policy action will depend upon how inflation behaves," Rangarajan said.
India's wholesale price index (WPI) -- headline price rise measure -- rose 7.23% in April from 6.89% in March, primarily driven by a double-digit rise in food prices, while core inflation or manufactured products inflation was at 4.9% from 4.7% in the previous month.
Rangarajan further said that India's GDP may grow at 6.5%-7% in the current financial year 2012-13, lower than the government's forecast of 7.6%.
Meanwhile, Finance Minister Pranab Mukherjee said that the dismal GDP figure for the fourth quarter was due to poor performance of the manufacturing sector, which contracted 0.3% during the March quarter.
"Q4 GDP growth lowest in contemporary times due to poor performance in manufacturing sector," Mukherjee told reporters.
For the full fiscal 2011-12, India's GDP grew 6.5% lower than the government's estimate of 6.9%, and sharply slower than 8.4% growth registered in the same duration a year ago.
Notably, 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.