US Fed rate cut 'relevant for India'

Mumbai: The US Federal Reserve's interest rate cut was a "relevant input" for India's central bank, but domestic factors still outweighed global ones, governor Yaga Venugopal Reddy said in an interview with the BBC.

India was better insulated from any slowdown in the US economy compared with other emerging econ-omies, Reddy said in the interview, adding that he was happy that inflation expectations were benign.

"As far as the Indian economy is concerned, while we're having increasing linkage with the global economy and the global fin-ancial markets, we're essentially a domestic economy-dominated system," he told the BBC's India Business Report, according to a transcript released before the interview was broadcast.

That meant the Reserve Bank's major considerations in setting policy related to domestic developments. As India became more integrated with the world, increasing weight was given to global developments, particularly in the US, he said. "So it is a relevant input to the ongoing analysis of the developments," Reddy said when asked whether local rates would fall after the US rate cut last week.

The US Federal Reserve cut its federal funds target rate by 50 basis points to 4.75 per cent, a larger cut than many in the markets had expected, to shore the economy up against a housing slump.

The Reserve Bank of India has raised its main short-term lending rate five times since last June to 7.75 per cent, with the last increase coming in March, to contain inflationary pressures and check sharp credit growth.

India's main stock index rose to a third straight record close on Friday, and the rupee hit a nine-year high of 40.85 per dollar last week after the Fed cut, driven by India's higher yields and expectations that calmer financial markets would see investors return to emerging econ-omies.

Inflation: Policymakers aim for 5% by March 2008

Reserve Bank of India governor Yaga Venugopal Reddy said that the bank's medium-term goal on inflation was to get it down to 4-4.5 per cent, and then eventually to three per cent to help the economy integrate with the rest of the world.

For the fiscal year ending in March 2008, the central bank is aiming to contain inflation at near five per cent. The annual wholesale price inflation rate eased to 3.32 per cent in the second week of September, the lowest in nearly five years and sharply down from a peak of 6.69 per cent in January, which was its highest in more than two years.