Govt says has scope for more monetary easing

By Rajkumar Ray

NEW DELHI (Reuters) - India has considerable scope for monetary easing next year and may need more aggressive action, the government said on Tuesday, stoking expectations the Reserve Bank will kick off another round of rate reductions soon.

Like central banks around the world, the Reserve Bank of India has slashed interest rates since mid-October to counter the impact of the global slowdown, taking its key lending rate down 250 basis points to 6.5 percent.

Government economic advisers also said there was scope for more interest rate cuts to stimulate the economy, backing a finance ministry report which said aggressive central bank policy may be necessary if the global economic turmoil continued.

"Having run tight monetary policy during H1 2008/09, there is considerable scope for monetary policy easing over the next six to 12 months to offset the global increase in demand for money that is being transmitted to India," the ministry said in its mid-year review.

"An aggressive monetary policy may be necessary if the global economic depression continues to adversely affect manufacturing."

Economists said the comments indicated the central bank could lower its main lending and borrowing rates at its next review in January or before. India's rates remain well above U.S. rates at 0-0.25 percent, or Japanese rates at 0.1 percent.

"I am looking at a cut in the reverse repo and repo rate of 100 basis points," said Abheek Barua, chief economist at HDFC Bank in New Delhi.

The benchmark 10-year bond yield dipped briefly to the day's low of 5.62 percent from a close of 5.71 percent as the report reinforced expectations of lower rates.