The Reserve Bank can ease interest rates further if inflation and current account deficit come down, asserted Governor D Subbarao and said today's 0.25 per cent rate cut was prompted by decelerating growth.
"If inflation moderates further, CAD moderates further, there will be more room for monetary policy easing but if they go along the currently expected lines, the space for monetary policy easing is quite limited," Subbarao told reporters at the customary post policy interaction at RBI headquarters.
Shedding its nine-month long hawkish stance, RBI today reduced the key interest rate by 0.25 per cent and decided to inject Rs 18,000 crore liquidity into the system.
"The main consideration for us to ease today was that growth had decelerated," Subbarao told reporters at the customary post policy interaction at RBI headquarters.
He, however, added that the RBI believes the slowdown in growth -- which stood at 5.4 per cent for the first half of FY'13 -- has hit the bottom and would only go up from here on.
"We were trying to balance growth and inflation considerations and growth has decelerated to the lowest in nine years," he said.
Today's repo rate cut came after nine months of holding on to elevated rates due to inflation and the widening fiscal deficit.
On the fiscal deficit, Subbarao said the Reserve Bank was going by the commitments of discipline, made by Finance Minister P Chidambaram in investor road shows in recent past.
The governor, however, focused a lot of attention on the widening current account deficit, calling it as "by far the biggest risk for inflation and for macroeconomic management".
He gave an explicit guidance on the monetary policy stance, saying further easing depends on a significant decline in CAD and inflation, which would be more than RBI's expectations.
Subbarao, however, did not specify a fiscal-end RBI estimate on CAD like it does on growth and inflation.
On inflation, he said the number will start going up post March on base effect and the impact of fuel price increases.
In his policy statement released this morning, Subbarao had said the decline in headline inflation provides a limited space for the monetary policy