2009-10 will be a tougher year, says RBI governor

""Reserve Bank of India Governor D Subbarao today said the next financial year could be a more difficult year""

“Year 2008-09 will be a difficult year and 2009-10 will also be difficult, perhaps a more difficult year,” he said after a meeting with West Bengal Chief Minister Buddhadeb Bhattacharjee.

Although Subbarao did not put out an estimate, this is the first statement from the central bank indicating tougher times ahead.

The governor reiterated that the economic growth projections for the current year may be revised downwards.

“IMF has revised its forecast for global growth and growth of emerging economies significantly. Reflecting that we would be doing our own numbers in our policy estimates in January,” he said.

RBI indicated that it would not stand in the way of any decision taken by the central and state governments to relax the timeline or agenda of the Fiscal Responsibility & Budget Management (FRBM) Bill to put state finances in order.

RBI sources said the unprecedented downturn in the economy justified extraordinary.

Speaking to reporters on the sidelines of a meeting with Bankers Club in Kolkata, Subbarao said: “We have announced some changes on Saturday. We have to wait and see the impact.”

On being asked if the central bank was mulling further interest rate cuts, Subbarao said: “We do not know when we will take a decision on interest rates.”

RBI had cut key lending rates 100 basis points Saturday as part of a coordinated stimulus package with the government. The IMF has reduced India’s gross domestic product (GDP) growth estimate for 2009 to 6.3 per cent. In 2007-08, the economy expanded 9 per cent.

In the mid-term review of the annual policy statement in October, RBI had projected a growth rate of 7.5 to 8 per cent, with a downward risk. On Saturday, while announcing the latest set of monetary measures, Subbarao had said the moderation is higher than anticipated.

The economy grew 7.6 per cent in the second quarter against 9.3 per cent in July-September last year. Since then, there have been further worrying signals. In October, India’s exports registered the first decline in seven years, and indications are that industrial growth numbers would also grow marginally or decrease.

Most overseas forecasters are expecting GDP growth in 2009-10 to be lower than the current financial year. Goldman Sachs, which has predicted 6.7 per cent GDP growth this year, expects it to moderate to 5.8 per cent in 2009-10. Citi India expects the Indian economy to grow at 5.5 per cent next year against 6.8 per cent this year. It has, however, warned that the downside risks are increasing.

Economists expect the RBI-government stimulus package over the weekend will help boost demand, but it may not reverse the decelaration in growth.

Subbarao also said he expected banks to pass on the benefits of the lower cost of funds.