As the government scrambles for measures to boost the slowing economy, a top finance ministry official today said there is scope for a RBI rate cut at the next policy review as retail inflation continues to be low.
The statement comes ahead of the Reserve Bank's bi-monthly monetary policy decision to be announced on October 4.
"There is scope for monetary easing because of inflation projections," the official said, adding that all the government analysis is made on the basis of inflation remaining under 4% in the medium term.
In its last policy review in August, the RBI reduced the repo rate by 0.25% to 6% in August, citing reduction in inflation risks. The rate cut was the first in 10 months and brought policy rates to a near 7-year low.
However, retail inflation rose to a five-month high of 3.36% in August due to costlier vegetables and fruits. The consumer price index (CPI) based inflation was 2.36% in July.
Asserting that the slowdown in the manufacturing sector is due to various reasons, the official said the response has to be from across the board, including interest rate, the exchange rate for boosting the manufacturing sector.
"Once the effect of demonetisation and GST substantially reverses, we should expect those sectors picking up. But those sectors have been affected by the appreciation of the currency. So it's a combination of these ones of the factors plus an appreciation of the currency," the official said.
The RBI has been intervening heavily to prevent appreciation of the rupee for the last three months and the real competitiveness of the domestic currency has improved a little bit but still not enough to offset the loss in the previous six months, the official added.
"One other good news is that volume of world exports has increased significantly. So manufacturing will pick up after the impact of demonetisation and GST wearing off," he said.
With regard to the Goods and Services Tax (GST), the official said problems with regard to returns filing is coming down.
There is a serious concern over behaviour as people tend to file tax returns towards the last date, the official said, adding that collections so far seem to be all right.