“Domestic factors are holding back growth,” Montek Singh Ahluwalia said at a conference in Mumbai.
“(I) would not be surprised If 6.5 -7.5 per cent growth is not achieved,” he acknowledged, adding that growth recovery would only be gradual and that he was expecting a turnaround in quarterly growth only after the next two quarters. “The growth had decelerated more than expected.”
India's GDP growth rate fell to a nine-year low of 5.3 per cent in the quarter ended March 2012, and slipped to 6.5 per cent for the full fiscal, below the 6.9 per cent that the Reserve Bank of India had projected. Headline inflation for the month of April also on the higher side at 7.23 per cent, driven largely by escalating food prices.
That level is not comfortable, Ahluwalia said, adding that the central bank needs to do a “balancing act”.
“Monetary policy needs to be forward looking, (there is) too much emphasis is being laid on the short term rate,” he said. “Lowering the rate would be a good signal, but there are a number of other factors.”
The RBI is scheduled to hold its mid-quarterly policy review on June 18, and industry is expecting tuthe central bank to cut its key interest rate to ease liquidity pressures and stimulate growth. In its April policy review, the RBI cut its repo rate by a larger-than-expected 50 basis points to 8.00 per cent, the first cut in three years, but cautioned against rising inflation.
Earlier on Friday, RBI deputy governor K C Chakrabarty indicated that the central bank was comfortable with the current levels, saying slowing economic growth was not because of high interest rates.
A Reuters poll of 20 economists showed that 75 per cent expected the central bank to cut its repo rate, given poor economic data and falling crude prices. Earlier this week, abother RBI deputy governor Subir Gokar had said the central bank had some "elbow room" to cut rates, given softer core inflation and falling oil prices.
On Friday, Ahluwalia also said there was no danger to the Indian financial system in the event that Europe’s banks collapse.
“There is no likelihood of a financial crisis in India if European banks fail,” Ahluwalia said. “Indian banks not exposed to European banks at all.”
On the contrary, he said, the European crisis “should in fact be better for Indian banks”. If anything, there would only be a short-term increase in the cost of capital in such a scenario, he said.
The euro zone crisis has hit the Indian currency, as the euro weakened against the dollar. That led to a steep fall in the rupee’s value, which slid to a historic low of 56.52 on May 31.
Ahluwalia, however, attributed a large part of the sudden fall in the Indian currency to large imports of gold, of which India is the second largest consumer in the world after China. Gold and jewellery are also one of the biggest imports for the country, along with crude oil and capital goods.
Saying the government was not planning to issue any sovereign bonds to help prop up the rupee, but added that he had not “discussed the sovereign bond issue with the government”.
Ahluwalia also reiterated that fuel prices needed to be aligned with global prices, saying that “India cannot grow rapidly” if this is not done.