The Reserve Bank has to ensure that money supply and credit growth are appropriate in the system so that no critical hurdle comes up in the way of economic growth amid global financial crisis and uncertainty, chief economic adviser Arvind Virmani said.
"There has been liquidity issues because of the crisis nature of the whole global system. You have to make sure that there is no kind of critical bottleneck that will crop up given this huge uncertainty, risk aversion, fears and so on.
The central bank has to do that, and I am assuming that they will do that," Virmani told PTI.
He also said there is urgency to remove hurdles in the way of infrastructure investment.
As far as the overall investment in the economy is concerned, there does not seem to be much difficulty this year but concerns are there that new projects may not be started from the next fiscal.
"So that (pending projects) issue is there and thought to be addressed in the next budget," he said.
The Reserve Bank is expected to signal cut in interest rates by banks on Saturday. It is expected to slash both short term rates, repo and reverse repo, at which it gives and borrows money from banks in exchange of government securities.
However, RBI may keep cash reserve ratio, the proportion of deposits that banks keep with RBI, intact.
While RBI has already injected around Rs 2,75,000 crore (Rs 2,750 billion) into the system through cuts in repo rate and reserve ratios, private sector banks have not cut lending rates.
They are demanding further cut in policy rates by RBI.
ICICI Bank CEO and MD K V Kamath had recently asked for 200-300 basis point cut in rates by RBI.
The government is also expected to come up with Rs 15,000 crore (Rs 150 billion) stimulus package for infrastructure, Rs 2,000 crore (Rs 20 billion) for exports besides other policy initiatives.
Meanwhile, the largest lender, State Bank of India, said that it will consider rate cut after the Reserve Bank of India announces reduction in benchmark rates.
"We will definitely look at our asset liability position soon after RBI's decision on rate cut," SBI chairman O P Bhatt said.
Last month, SBI has already reduced benchmark lending rate by 75 basis points to 13 per cent.
Commenting on the proposed fiscal stimulus package that the government intends to announce tomorrow, Bhatt said, although there is no threat of recession in the country, growth is slowing. This package will help increase liquidity and encourage consumption behaviour.
He also said that RBI should further reduce cash reserve ratio, so that cheap funds are made available to banks for lending.
With inflation going down to 8.40 per cent, analysts said focus has now clearly shifted to boost growth.
After clocking close to nine per cent growth rate, Indian economy grew at a slower rate of 7.8 per cent in the first half of this fiscal with areas like manufacturing, electricity and mining sectors slowing down.
Besides, export growth declined by 12 per cent in the month of October, forcing the government to revise the target for this sector to $175 billion from earlier $200 billion for this fiscal.