Mumbai: RBI has scope to cut borrowing costs further as growth slows and inflation approaches a level "we can live with,'' FM P Chidambaram said.

The  inflation rate dropped the most in close to two decades to 8.98% this month as commodity prices tumbled.

Chidambaram expects price increases to slow to between 6.5% and 7% by December, almost half the 16-year high reached in August. "How rapidly inflation declines will decide how the central bank moves," India's longest-serving finance minister since 1980 said in an interview on Tuesday.

"We have not yet licked inflation, though our expectation is it will come down." Chidambaram on Tuesday met Governor D Subbarao as Indian policy makers work to limit the impact of a global recession on Asia's third-largest economy. FM said companies benefiting from lower borrowing costs should cut prices to help revive domestic demand. "The writing is on the wall for interest rates to drop in India," said Ravi Chaudhry, chairman of Cemex Investment & Services Ltd, a New Delhi-based company that provides investment advice to governments including Norway and Brazil.

"The crisis in the US is endemic." The US, Europe and Japan slipped into recession last quarter, and China's economy is slowing. "We need to ensure that our domestic economy, at least the insulated parts of the domestic economy, continues to grow at a rapid rate," said FM.

"It's the external sector that's causing problems, we will have to compensate that. If exports decline, we will have to compensate that by stimulating domestic consumption." India, with 1 billion population, next to China's, is relying on spending by local consumers and firms to make up for a slump in overseas sales.

Source : Bloomberg