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India's FM voices rate cut ahead of RBI policy review

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March 30
4:38 AM 2016

India's Finance Minister Arun Jaitley has indicated a possible interest rate cut ahead of Reserve Bank of India's (RBI) review meeting next week. The Indian government is keen on controlling fiscal deficit. The Centre has already lowered interest rate on small savings facilitating more room for lending rate cut. RBI lowered interest rate by 125 basis points in less than 15 months. 

RBI's review meeting on 2016-17 monetary policy is scheduled on 5 April 2016. The Indian government is aiming for a 3.9 percent fiscal deficit in gross domestic product (GDP) for the current financial year and 3.5 percent of GDP for next fiscal beginning April 2016. Responding to a question on what could be expected from RBI Governor Raghuram Rajan in review meeting, Jaitley said "I want what everybody wants."

The Economic Times reports that India's Finance Ministry has taken a decision to ease the interest rate on small savings considering it's too high. The higher interest rate on small savings was leading to higher lending rate. Inflation rate is hovering at five percent. High inflation rate could make domestic economy sluggish, said Jaitley.

Jaitley further said "I think we were watched very closely in a low price regime, you say though I am the fastest growing economy, oil prices suits me, but I can't still manage my expenditure. So I am increasing fiscal deficit."

LiveMint adds that RBI may adopt a accommodative policy as the India's reserve bank wants to support liquidity in the domestic banking system. Repo rate may be lowered by 25 basis points (bps) in RBI's next review meeting.  Modest economy recovery and modest inflation rate are positive factors for RBI to take a decision to cut interest rate. Some economists opine that the 50 basis points report rate cut may not be ruled out. 

The Indian government deviated from fiscal deficit in 2015. According to Jaitley, "...you can't do it year after year. I am glad we stuck to 3.5 per cent because the world at least has taken our decision very positively."

Reserve Bank of India has cut Repo rate by 125 basis points to 6.75 percent so far. The inflation rate further declined to 4.9 percent in 2015 from 6.6 percent in 2014. However, banks lowered the lending rate by only 60-70 basis points only. The high rate on small savings prevented banks from lower deposit rates, as reported by The Indian Express.

Some economists predict 50 basis points cut in interest rate in the review meeting next week. Lowering the interest rate could boost the industrial growth and production level as well. Rajan had earlier cautioned against any deviation from fiscal discipline. The Indian government sticks to the fiscal consolidation in the Union Budget 2016-17 as it needs an increased public expenditure.

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