Delivering the keynote address at the national conference and annual session 2009 of the Confederation of Indian Industry (CII), Reserve Bank of India governor D. Subbarao on Thursday put an end to the fears of a deflationary situation gripping the country, but said the next fiscal year 2010 could be more challenging than the current financial year.

Subbarao predicted that the next fiscal is going to be very challenging and painful adjustments are inevitable until the economy recovers, unless business confidence resuscitates, or investment revives. To arrest the moderation in growth would be a challenge, as economic activity is slowing down.

After posting a growth of over 9% in the preceding three fiscal years, the Indian economy is projected to grow at only at 7.1% during the current fiscal year, as per an estimate by the government's statistical agency. But Subbarao foresees that India's recovery would be sharper than the rest of the world, because of normal functioning of the country's financial markets and more than adequate foreign exchange reserves. In addition, there has been no wealth-loss affect and agriculture credit is also not affected due to downturn.

On the question of exporters, who have been hit hard by the global economic downturn, Subbarao said that the export sector could only revive, if export demand is rejuvenated. He added that the government has already taken steps to help exporters.

He also said that RBI has set up a committee to study the gems and jewellery sector, which is one of the worst hit sectors, and that similar sectoral studies are needed.

From October last year, the growth rate in exports recorded negative zone, as major markets like the US, Europe and Japan, which collectively account for half of the world's output, have slipped into recession.

As regards further interventions, the RBI governor underlined the cost benefit impact of putting a third package in place. He, however, felt that the need of the hour was to give time for the two stimulus package to run through the system before considering further measures.

Regarding current account deficit, he said it was within modest levels and hoped that the lower crude prices would give sufficient space for the government to spend on other fronts in the interest of the economy.

The governor said interest rates were much higher than in other countries and had to be brought down to make India more competitive. With commercial lending rates not dropping correspondingly with the cut in repo rates, the RBI has decided to closely examine the effectiveness of the monetary policy transmission mechanism.

On lower crude prices, Subbarao said this would yield fiscal space and the current account deficit would be reduced. The decline in inflation to 0.27% in the second week of March is a healthy feature, but the consumer price index (CPI) is still high and there is no fear of sustained deflation in India because some of the indices of CPI are still hovering in double-digits.

In conclusion, the RBI governor said forecasting a time frame for the recovery of the economy was not easy, but said India would be among the first to take off the blocks.

For comments and feedback: contact editorial@rttnews.com