Fiscal deficit may dictate rate cuts, says Montek

The shortfall expected to be 5.6% of GDP in FY12

Amid demand for softening of monetary policy to promote growth, the plan panel said any move by Reserve Bank of India to lower interest rate will mainly depend on the government's ability to contain fiscal deficit.

“Interest rate is going to be determined predominately by what happens to the fiscal deficit.

The industry is convinced that no matter what happens to fiscal deficit, the RBI will lower the repo rate,” Planning Commission Deputy Chairman Montek Singh Ahluwalia said here at an Assocham conference.

India’s fiscal deficit is expected to be 5.6 per cent of Gross Domestic Product (GDP) this fiscal as against the budget estimates of 4.6 per cent of GDP.

The central bank is expected to take more steps in its policy review on March 15 to ease liquidity situation to promote economic growth which is expected to moderate to 6.9 per cent in the current fiscal from 8.4 per cent a year ago.

The Reserve Bank in its last policy review reduced Cash Reserve Ratio, the money the banks are required to maintain with the central bank, by 0.5 percentage point to 5.5 per cent to release Rs 32,000 crore of primary liquidity into the system.

Ahluwalia also said: “The determinants of long-term interest rates in India are really going be things like what happens to fiscal deficit and what happens to funds outside the country, which will determine general liquidity.”

He expressed concern over that the mounting current account deficit (CAD).  “Now inflows from all sources like FII, FDI will finance current account deficit. It is very difficult to judge prospects right now simply because there is huge uncertainty internationally,” Ahluwalia said.

Further, seeking to allay fears of any financial constraints for development of infrastructure in the country, he said he expects operationalisation of at least one infrastructure debt fund (IDF) during the next fiscal.

Ahluwalia pointed out that rght now, rather than funds,  what is constraining infrastructure development is probably implementation bottlenecks, particularly, relating to environment, land acquisition and fuel supplies.

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