India can cut interest rates further, says ADB study

India has room to cut interest rates further, and it should quickly disburse funds related to the fiscal stimulus packages announced recently to cushion economic growth from the impact of the global economic turmoil, Asian Development Bank (ADB) said in a new study published today.

“There is further room for interest rate reductions, particularly in India and Sri Lanka. While most countries have little scope for large stimulus packages, given deficit constraints, India, which has introduced two of them, should disburse the funds swiftly for maximum impact,” the study said.

Titled ‘The Impact of the Global Economic Slowdown on South Asia’, the study also noted that the sub-region had been hit by capital outflows and weaker commodity prices, and faced a sharp slowdown in exports and remittances as global troubles worsened.

“Governments could consider incentives to encourage overseas workers to remit money home, such as special savings instruments, and they should also discuss currency swap arrangements and other measures to keep their financial systems stable,” it added.

A number of short-term measures have been taken to cushion the impact of the crisis, including monetary easing and fiscal stimulus packages. India had announced a Rs 20,000-crore additional planned expenditure in the current fiscal, refund of certain service taxes, interest subsidy to labour-intensive sectors and extended finance support to various sectors, including infrastructure.

Additionally, the Reserve Bank of India had cut repo rate, the rate at which the central bank lends to banks, for the fifth time since October 20, and the overall cut effected since the global credit crisis intensified added up to 400 basis points. Since September, the central bank had also lowered cash reserve ratio requirements, or the proportion of deposits that banks set aside, by another 400 basis points to inject Rs 1,60,000 crore into the system.

“South Asian countries can weather the global financial crisis by taking both short- and long-term measures to stimulate their economies,” the study said.

“In the long term, South Asian countries need to reduce their fiscal deficits, diversify their economies, step up infrastructure investment and boost intra-regional trade to take up the slack of lower demand from G7 nations,” it added.

“While some countries in South Asia have had relatively less exposure to the crisis from the adverse impacts of capital flows, more than half of the 900 million people in developing Asia who survive on US$1.25 a day live in the sub-region, so any tempering of growth is a serious cause for concern,” said ADB President Haruhiko Kuroda.

The study is being presented as a discussion paper at the South Asia Forum on Impact of the Global Economic and Financial Crisis, a two-day forum being held at ADB headquarters at Manila on March 9 and 10.

The global financial crisis slashed the value of financial assets worldwide by $50 trillion in 2008, said an ADB study on the global financial turmoil. Financial asset losses in developing Asia, which suffered more than other emerging markets, totalled $9.6 trillion, or just over one year’s worth of developing Asia’s gross domestic product, the ADB report said.