India Central Bank Hawkish Despite Easing Inflation
Despite easing inflation and expectations of further interest rate cuts, India's central bank governor is striking a hawkish note, saying that the room for monetary easing is limited.
"There is room for monetary easing over the next few months, but that room is limited, because of the outlook for inflation and outlook for growth," Duvvuri Subbarao, Governor, Reserve Bank of India (RBI) told CNBC on the sidelines of the Group of 20 Nations (G-20) meeting of finance ministers and central bankers in Moscow.
"There are a number of risk factors for inflation, by far the most important is the current account deficit, because this year we expect the current account deficit as a proportion to GDP to be historically the highest, we'll need to take that into account for our monetary policy calibration," Subbarao said over the weekend.
India's current account deficit widened to a record high of 5.4 percent of GDP in the September quarter.
(Read more: India Braces for Most Austere Budget in Years)
Subbarao's view comes as analysts predict that the RBI will cut its benchmark interest rate by up to 100 basis points to 6.75 percent by the end of this year, following a 25 basis point reduction in January – the central bank's first such move in nine months.
Analysts are calling for the second 25 basis point cut this year to happen at the RBI's March 19 meeting after India's closely-watched wholesale price index (WPI) fell for a fourth consecutive month to 6.62 percent in January – the lowest level since November 2009.
(Read more: Expect a Far More Dovish India Central Bank)
Slowing growth in Asia's third largest economy, which is projected to have expanded just 5 percent in the fiscal year ending in March from the 8-9 percent growth seen in the past decade, is also adding pressure on the central bank to step up monetary easing to revive economic activity.
But Subbarao said that he's still waiting to see the fiscal deficit number and more fiscal consolidation before pulling the trigger on easing.
"An important variable for monetary policy calibration is of course the fiscal adjustment that the government will do, and will come up with deficit stats in the budget," Subbarao said.
The country's finance minister P.Chidambaram told CNBC late last month that the annual budget to be presented on February 28 would show that he has been able to achieve the fiscal deficit target of 5.3 percent.
—By CNBC.com's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu