Bloomberg News

India Must Pare Goals as Deficits Curb Rate-Cut Room, Reddy Says

July 16, 2012

India needs to pare unrealistic growth expectations as fiscal and current-account deficits underscore risks in the economy and curb scope for interest-rate cuts, a former central bank governor said.

“Many of the faster growing emerging-market economies don’t have such a serious fiscal problem, most of them don’t have twin deficits,” Yaga Venugopal Reddy said in an interview in Mumbai today. “India has twin deficits, which means the starting point is vulnerable. It’s time we reset expectations.”

Reserve Bank of India Governor Duvvuri Subbarao refrained from a rate cut in June even with economic expansion at a nine- year low as inflation holds above 7 percent. Reddy said prior annual increases in gross domestic product of about 9 percent were “sort of overheating” and 7-8 percent is more normal, adding excessive growth expectations have been “shattered.”

“The maneuverability for monetary policy action is constrained, simultaneously, by the fiscal excesses and the current-account deficit,” said Reddy, who ran the central bank from 2003 to 2008.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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