Govt likely to be kept waiting for rate cut

Price pressures are likely to outweigh political influence when the Reserve Bank of India (RBI) reviews interest rates later this month, after the latest inflation data reinforced the central bank’s cautious stance despite calls from the new finance minister to ease policy.

Price pressures are likely to outweigh political influence when the Reserve Bank of India (RBI) reviews interest rates later this month, after the latest inflation data reinforced the central bank’s cautious stance despite calls from the new finance minister to ease policy.

Since his appointment at the end of July, Finance Minister P. Chidambaram has brought greater urgency to policymaking, backing a series of bold reforms that cost his coalition government an ally and reduced it to a minority last month.

Now, Chidambaram wants central bankers to take a few risks to help restore momentum to an economy stagnating near its slowest growth rate in three years.

The RBI, however, is not yet satisfied with New Delhi’s fiscal consolidation measures and awaits more steps to reduce the deficit before it pulls the trigger on rates, officials close to policymaking said.

“There will always be pressure from the ministry, but we have to be clear in explaining to them the problems on inflation,” said one RBI official, who declined to be identified due to the sensitivity of the matter.

“There is hardly any room to cut rates unless there is more action on the ground on reducing the fiscal deficit.”

The best that New Delhi may get this month from the RBI is a gesture of support in the form of a cut in the cash reserve ratio (CRR) for banks that many in the market predict.

There is general acceptance that India’s interest rates, among the highest in the world’s major economies, should be cut at some point — the question is when.

Officials at RBI headquarters on Mint Street in Mumbai and Chidambaram’s aides in New Delhi have been arguing their corner in the run-up to the central bank’s policy review on October 30.

With the policy repo rate standing at 8.0 percent, RBI Governor Duvvuri Subbarao would be even more reluctant to cut rates after data released on Monday showed inflation at a 10-month high near 8 percent, with worse expected in coming months.

The fiscal deficit is forecast by analysts to reach 5.8 percent for the financial year ending in March due to weak revenue and hefty subsidies, giving credit rating agencies one of several reasons to think about relegating India’s sovereign debt rating to junk status.

Upward pressure on inflation was inevitable after New Delhi’s decision to raise fuel prices. If it fails to come down before the next review in mid-December, Chidambaram could find it harder to persuade the central bank to cut rates, as the government is expected to return to the market for more borrowing to meet its fiscal shortfall.

“December will be a crucial time as the winter session of the parliament starts, and it is to be seen whether there will be supplementary demand for grants, additional borrowing, as these will fuel growth but also push up inflation,” said another official close to policymaking.

Agencies

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