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FM sets fiscal road map; RBI sings growth tune

Last updated on: October 30, 2012 09:20 IST

FM sets fiscal road map; RBI sings growth tune

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BS Reporters in Mumbai/New Delhi

The finance ministry and the Reserve Bank of India seem to be in perfect sync.


Hours after Finance Minister P Chidambaram pledged to nearly halve the fiscal deficit to three per cent of gross domestic product by 2016-17 and hinted the central bank should take the cue, the RBI said the monetary policy might respond more effectively to growth concerns.

Earlier on Monday, Chidambaram said the FY13 fiscal deficit would come in at 5.3 per cent of GDP, up from the Budget target of 5.1 per cent.

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Photographs: Reuters

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"I sincerely hope that everybody will read my statement and take note of that," Chidambaram said in response to a query on whether the RBI would cut rates.

In its review of macroeconomic and monetary developments for the July-September quarter released a day ahead of the second quarter review of the monetary policy, the Reserve Bank of India said, "as macro risks from inflation and twin deficits recede further, that could yield space down the line for monetary policy to respond more effectively to growth concerns".

The twin deficits refer to India's fiscal and current account deficits.

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Image: A worker inside a steel factory at Ludhiana.
Photographs: Ajay Verma/Reuters

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Analysts were quick to point out the RBI's language was less hawkish than in the recent past, as it said inflation pressure was likely to moderate starting in the January-March quarter -- a sign the central bank might be ready to ease policy rates, having left them unchanged since April.

"Most likely, there will be a CRR cut of 25 basis points.

"But we are not ruling out a cut of 25 basis points in the repo rate as well," said A Prasanna, chief economist, ICICI Securities.

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Image: Men work at the construction site of a high-rise commercial building in New Delhi.
Photographs: Parivartan Sharma/Reuters

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Market participants see liquidity support from the central bank in the form of a cut in CRR, as liquidity deficit has been in the range of Rs 1 lakh crore (Rs 1 trillion), much beyond the comfort zone of the central bank.

The RBI has maintained liquidity will be made available to productive sectors.

But others were not so sanguine.

"If the RBI actions are guided by the need to reciprocate the fiscal initiatives, the probability of rate reduction is more. But today's macroeconomic report suggests holding of rates," said Abheek Barua, chief economist, HDFC Bank.

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Photographs: Reuters

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The only reason for the central bank to be cautious is that inflation is still much above its comfort zone, with wholesale price-based inflation at 7.8 per cent in September.

The central bank was quick to point that out and said swift implementation of fiscal measures was needed, and warned inflation remained a risk.

The RBI cut its GDP growth forecast to 5.7 per cent from the earlier 6.5 per cent for 2012-13.

In his media conference, the finance minister projected the current account deficit to be 3.7 per cent of GDP or $70.3 billion against a record 4.2 per cent last fiscal and said most of it would be funded by foreign direct investment, foreign institutional investment and external commercial borrowing.


Photographs: Reuters
Tags: GDP , RBI

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