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.

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 an RBI official, adding, “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. 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 per cent, RBI Governor D Subbarao would be even more reluctant to cut rates after data released on Monday showed inflation at a 10-month high near 8 per cent, with worse expected in the coming months.

The fiscal deficit is forecast by analysts to reach 5.8 per cent 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.

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While Chidambaram has impressed investors with an aggressive slate of initiatives, including raising subsidised diesel prices and opening sectors like supermarkets to foreign players, he has more to do on the fiscal front to convince the RBI.

“We all along knew raising diesel prices would add to inflation. But they (RBI) were arguing for raising diesel prices. Now that we have done that, it is up to them how they wish to respond,” one official with the ministry said. Chidambaram has said more corrective measures are on the way, and one aide said they were imminent and could make it easier for the RBI to lower interest rates.

“The government is likely to take additional fiscal steps before the October 30 monetary policy, which should provide comfort to the RBI,” said a ministry official. The RBI cut its policy repo rate by 50 basis points in April to 8 per cent in expectation that the government would follow with fiscal moves. New Delhi did not begin to deliver until Chidambaram’s initiatives last month, and with elections due in 2014, it will be hard for the coalition to countenance radical spending cuts.