Interest rate alone not responsible for slowdown
Ahead of its policy review, RBI Governor D Subbarao on Tuesday said interest rate alone was not responsible for dampening India's potential growth which may have slipped to 7.5 per cent, lower than in the post-global crisis period of 2008.
The uncertainty surrounding economic activity has heightened in the post-crisis period and India is no exception, he said at the Statistics Day Conference in Mumbai.
"The Reserve Bank maintains that interest cost is only one of the several factors that have dampened growth," he said adding that investment slowdown too was not because of rise in policy rate alone.
On impact of economic uncertainty, he said the country's potential growth rate, as per the RBI's own assessment, before the onset of the global credit crisis, was 8.5 per cent, which slipped to eight per cent during the crisis.
"Latest assessment following the standard filtering technique suggests that potential output growth may have further fallen to around 7.5 per cent," he said.
He also questioned the linkage between deceleration in industrial growth to 6.5 per cent in 2011-12 and rise in policy rates by 3.75 per cent between March 2010-October 2011.
His comments come two weeks ahead of the quarterly monetary policy review which is due on July 31 amidst a strong demand for cut in interest rates from the industry in the wake of economic growth falling to nine-year low of 6.5 per cent during 2011-12.
"... it is necessary to look behind the data and explore what lies underneath," he added.
He has asked the RBI research wing to study relationship between real interest rate and investment activity.
The RBI chief added that assessing India's potential growth rate, consistent with the objective of low and stable inflation, remains a challenge.
The potential growth is defined as growth without fuelling inflationary expectations.
Keywords: policy review, RBI Governor D Subbarao , India's potential growth, economic activity , Mumbai, Reserve Bank , interest cost ,business news
