Hyderabad, Jun 8 (KNN)  The interest rate cut to be announced this month will be determined by the monsoon outlook and its impact on inflation, the Reserve Bank of India (RBI) Governor, D Subbarao said.

“Most importantly we also chase monsoon like millions of farmers across the country. So, the monsoon outlook, the monsoon performance is going to be the important factor in determining the RBI policy in the next three months,” he said.

The RBI Governor said this while delivering a lecture - 'India's Macroeconomic Challenges: Reserve bank Perspectives' - on the occasion of Institute of Public Enterprise's Golden Jubilee celebrations here.

Earlier, the Reserve Bank governor had warned of limited room for interest rate cuts while announcing the monetary policy last month.

The RBI trimmed the repo rate to 7.25 per cent in May, its lowest since May 2011, and kept the cash reserve ratio (CRR) for banks unchanged at 4 per cent, in line with expectations.

Credit growth in India slowed to a roughly three-year low at 13.9 per cent as of April-5, in part because banks, faced with expensive deposit costs amid tight cash conditions, have failed to pass along most of the rate cuts to borrowers despite prodding from the central bank.

Monsoon rain is an important factor in determining the price levels, especially agricultural commodities.  If the prices of farm products rise, then it even affects the broad-based inflationary trend restricting the central bank's ability to lower interest rates. 

As per the Indian Meteorological Department (IMD) prediction, monsoon is expected to be normal this year.

"As we move forward, we will keep track of growth as it evolves; keep track of inflation as it evolves; and keep track of balance of payment situation as it evolves," he said. 
Inflation, as measured by the wholesale price index, has eased to multi-year lows following the economic slowdown raising hopes of a central bank rate cut. But the retail inflation is still high.

On India's current macroeconomic situation, Subbarao said the growth last year moderated to 5 per cent, lowest in a decade.

He also said that though inflation came off from the peak, balance of payments is under stress and investments have decelerated. He termed the deceleration in investment as disturbing and attributed it to both external and domestic factors.

Subbarao, whose five-year term ends in September, has repeatedly called on the government to take measures to ease supply constraints in the economy and encourage investment.  (KNN)