Mumbai, Feb. 18 The demand for bank credit is slackening despite the comfortable liquidity in the system and commercial banks should cut lending and deposit rates in order to keep credit flowing to the productive sectors, the RBI Governor, Dr D. Subbarao, said in his speech on ‘Impact of the Global Financial Crisis on India Collateral Damage and Response’ in Tokyo on Wednesday.
The refinance windows opened by the RBI for the MSME, housing and export sector should facilitate the flow of credit to these sectors, he said.
Highlighting the slowing of economic activity, Dr Subbarao said the growth moderation may be steeper and more extended than earlier projected. He cautioned that the crisis would dent India’s growth trajectory due to a slowdown in investments and exports.
“Higher input costs and dampened demand have dented corporate margins while the uncertainty surrounding the crisis has affected business confidence. The index of industrial production has shown negative growth for two recent months and investment demand is decelerating suggesting that growth moderation may be steeper and more extended than earlier projected”.
This coupled with a slowdown in the services sector, mainly construction, transport and communication, trade, hotels and restaurants is leading to a moderation in the growth of real GDP.
However, pointing out the positive factors, Dr Subbarao said a decline in inflation should support consumption demand and reduce input costs for corporates. Also, a fall in oil prices and naphtha prices would reduce the oil and fertiliser subsidies and provide more funds for infrastructure spending.
In the external sector, projections that imports will shrink more than exports should keep the current account deficit at modest levels, he said.
The Governor signed off on a positive note saying, “Once the global economy begins to recover, India’s turn around will be sharper and swifter, backed by our strong fundamentals and the untapped growth potential”.
Source : Business Line