Interest rates may ease after stability in forex market: PMEAC
New Delhi: Prime Minister's key economic advisor C Rangarajan Tuesday said RBI will have more space to ease interest rates once the stability is restored in the forex market.
He said the main task before Raghuram Rajan, who takes over as the new Governor of the Reserve Bank on Thursday, will be to improve the price situation, stimulate growth and ensure financial stability.
"The RBI policy review is in another 2-3 weeks. We will have to see what happens to the pressure on rupee. The RBI will have a greater space if rupee gets stabilised in this period," Rangarajan, Chairman of the Prime Minister's Economic Advisory Council, said on the sidelines of a function here.
With the return of stability in the forex market, "it would be possible for monetary policy to adopt a different stance, an easier stance", he said.
Since end-May there has been volatility in the foreign exchange market. The rupee has declined by over 20 percent on account of global and domestic factors including sharp rise in the Current Account Deficit (CAD).
The rupee, which has weakened against several currencies, today closed at 67.63 against the US dollar, down 163 paise or 2.47 percent.
Rangarajan, a former RBI Governor, also underlined the need for restoring stability in the different spheres of economy.
"We need to bring about price stability, stability in foreign exchange market and stability in fiscal system. We have deviated from it in the last few years," he said.
Reposing faith in the government's resolve to contain CAD at USD 70 billion in current fiscal, Rangarajan said it was possible to achieve the target with some adjustment in gold, oil and coal imports.
CAD, which reflects the difference between outflow and inflow of foreign exchange, touched a record high of USD 88.2 billion in last fiscal.
"In short term we have to ensure capital flows are adequate (to finance CAD) and in medium term we need to bring down the CAD," the PMEAC chief said.
Talking about growth, Rangarajan said the county needs to address the issues that had stymied GDP expansion.
"Agenda for growth can also be called agenda for reforms," he said, adding that high growth does not warrant high inflation.
On lowering expenditure on subsidy, Rangarajan said it was one area which needs to be addressed by the government, which had proposed to bring down subsidy to 2 percent of GDP.
While emphasising the need to provide fully for the the food subsidy, he said, the government could look to pruning subsidies in other areas.
As regards fiscal consolidation, Rangarajan said the government would work towards achieving target specified in the FRBM Act.