Asia-Pacific News

Modi adviser Panagariya puts pressure on RBI to cut interest rates

Getty Images

A top adviser to Prime Minister Narendra Modi called on Thursday for cuts in interest rates to boost India's sluggish economy, putting pressure on the cautious Reserve Bank ahead of a policy review later this month.

While India's projected economic growth of 8 percent is viewed by the IMF as a bright spot among major economies, Asia's third-largest economy is still suffering from excess capacity.

Arvind Panagariya, who runs the government's NITI Aayog policy commission, said the economy needs cuts of 50-100 basis points. He said the Reserve Bank of India (RBI) should act regardless of the outcome of a U.S Federal Reserve meeting next week.

India's Rajan on inflation

"The case for cutting rates is so strong," Panagariya, a formerly U.S.-based economist who joined Prime Minister Narendra Modi's administration in January, told CNBC-TV18 in an interview.

"Whatever, the Fed does, we are ripe for a 50 basis point rate cut," said Panagariya, who has a cabinet rank in the government.

The Federal Reserve is meeting on Sept. 16-17 to ponder the timing of the first interest rate rise in the United States since the global downturn of 2008.

Read MoreTwo weeks, three reform setbacks for India's Modi

With the rate decision widely expected to roil emerging markets, analysts expect the Fed's move to be a critical element in determining the RBI's monetary stance at a policy review meeting on Sept. 29.

The RBI has lowered rates by a total 75 basis points lower since January with three cuts. However, it left the policy repo rate on hold at 7.25 percent at its last meeting, tying future cuts to the inflation outlook.

Companies say the cost of capital needs to come down to spur a wider recovery. At a meeting with Modi on Tuesday that was also attended by Panagariya, Indian business leaders called for interest rates to be cut as much as 1.25 percentage points by next March.