RBI governor says investment demand to decline further

18 Feb 2009 | 14:16 RBI governor says investment demand to decline further

The Reserve Bank of India (RBI) governor D Subbarao today, 18 February 2009, said the impact of the global recession on India was sharper than expected. His comments stoked speculation of more interest rates cuts to shield the domestic economy from the global financial sector crisis and recession in key global economies

Speaking at an event in Tokyo, the RBI governor said investment demand is on a decline adding that there would be further downturn in investment demand before it turns up. He said consumption, which accounts for about 60% of the $1.2 trillion economy, is holding up and said the recovery in India will be faster than in other countries.

Subbarao said the current account deficit should be more modest than earlier feared because imports will shrink faster than exports thanks to lower commodity prices.

Market men see a bigger role for RBI in the coming months as election code will be in force by the end of this month which means that there cannon be any policy action from the government. Once the model code of conduct comes into force after the announcement of poll dates, any announcement by the government will be subject to Election Commission's (EC) scrutiny.

The EC is likely to announce the poll date for the parliamentary elections by the end of this month. The elections are likely to be held in April-May 2009

Meanwhile, the Centre today sought parliament's approval for Rs 10765 crore in extra spending for this fiscal year. In its interim budget the government said the fiscal deficit is seen at 6% of GDP at end 2008-09, far higher than the initial target of 2.5% set for the current year.

But the deteriorating fiscal position of the government has raised fears of downgrade of India's sovereign rating by international ratings agencies. If India's sovereign rating is downgraded, it will significantly raise the cost of borrowing of Indian firms in global markets - something the government had banked on to ease the domestic credit crunch. The financial meltdown had already reduced these inflows; a rating downgrade will put an end to them altogether.


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