Welcoming rate cut by RBI, the government on Tuesday said a recovering economy needs policy support and the third reduction in interest rates this year was consistent with trend in economy including strongly declining inflation.
Chief Economic Advisor Arvind Subramanian played down inflation worries arising out of below normal monsoon rains saying the government will act to contain price rise risks.
"These cuts are consistent with the trends in the economy including strongly declining inflation, contained current account deficit and ongoing strong fiscal discipline," he told reporters here.
Yielding to demands from Finance Minister Arun Jaitley and industry, Reserve Bank Governor Raghuram Rajan cut repo rate (short-term lending rate) to 7.25 per cent from 7.5 per cent, a move that is likely to result in lower borrowing cost for individuals and corporates.
Subramanian said, "The government and RBI agree that these cuts signify that the economy needs policy support as economic growth is recovering while the external environment remains weak." Both the institutions, he said, "will work together to ensure that the macroeconomic remains strong while investment and growth are accelerated towards their potential."
Asked about banks passing on the reduction in rates to borrowers, he said: "We have to wait and watch on transmission to cut in lending rates."
Playing down the impact of below normal monsoon on prices, Subramanian said the government through its policy managed to contain inflation last year when rainfall was not very good.
"Last year as well the monsoon was not very good and through government policy we managed to contain inflation and we intend to do that this time around should the monsoon be as bad as some people fear. "We don't know how it is going to pan out but I think the government will certainly act to contain the inflation risk," he said.
On RBI lowering projection of economic growth, as measured by GVA (gross value added), to 7.6 per cent from 7.8 per cent estimated in April, he said: "I have explained the basis of our economic survey forecast and let's see how it pans out.
People should have different estimates." On possibility of more rate cuts he said: "We have to wait and watch."
