Rangarajan lauds RBI, sees economy growth at 7.5% in FY13

In a bid to boost growth, the Reserve Bank of India (RBI), in its annual monetary policy for 2012-13, has cut the policy rates by 50 basis points.

The repo rate now stands at 8% from 8.50% earlier. Similarly, the reverse repo rate is now at 7% from 7.50% earlier. Lauding the central bank, C Rangarajan, chairman of Prime Minister's Economic Advisory Council (PMEAC) says, the RBI has taken a good decision. According to him, the apex bank was pulled by two opposite set of factors. “First, the decline in industrial production was much stronger than what’s originally expected. On the other hand, while headline inflation has not shown much good (decline), the non-food manufacturing inflation has shown a definite decline,” he elaborates. He thinks the rate of growth of the economy in the current fiscal will be close to 7.5%. Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying video. Q: Fifty basis points cut. Does this come as a bit of a surprise because the consensus was it will be a token 25 bps cut and no more than that? A: I think the Reserve Bank has taken a good decision. They were pulled by two opposite set of factors. First, the decline in industrial production was much stronger than what was originally expected. On the other hand, while headline inflation has not shown much good (decline), the non-food manufacturing inflation has shown a definite decline. So, taking these two factors together, the Reserve Bank has decided to go in for decisive signal on what the policy should be. Q: RBI is saying that the gross domestic product (GDP) growth for the current year is projected at 7.3%. That’s lower than PMEAC’s projection and lower than what the Budget said. But they say that, at the moment, the trend rate of growth post crisis for the economy is close to 7.5%. Their sentence is, “our projection is that the economy will revert to its post crisis trend growth in 2012-13 and that is 7.3%. That does not leave much room for monetary policy easing without aggravating inflation risks. What's your comment on all the three? First, their GDP growth rate forecast is lower than the government’s forecast at 7.3%. They believe that the trend rate of growth is 7.5% and therefore there is no further scope for easing monetary policy without aggravating inflation risk. What are your comments? A: I think the rate of growth of the economy in the current fiscal will be close to 7.5%. It is really difficult to be so precise, but I still believe that that growth rate at 7.5% during the current year is still possible. As far as the trend in the potential rate of the growth of the economy is concerned, there are differences as to what the potential rate of the growth of the economy is. I believe that given the overall industrial rate and the savings rate of the economy, our potential rate of growth of the economy lies somewhere between 8-9%, not lower than that.