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...but bankers remain sceptical

Mumbai, March 18: Some bankers believe that Pranab Mukherjee’s stand on checking fiscal deficit is not forceful enough to merit a significant rate cut by the RBI.

RBI governor D. Subbarao had clearly said strong signs of fiscal consolidation were critical to the lowering of the repo rate. Mukherjee’s calculations have led to scepticism among some bankers and analysts who believe his efforts at fiscal consolidation are unlikely to lead to an aggressive rate cut.

While many believe that the actual fiscal deficit for 2012-13 can turn out to be higher, there is also a growing feeling that even if the RBI slashes rates, a sharp reversal is unlikely.

“The budget does not contain any radical reform moves on subsidy rationalisation front. This will not be lost on the RBI. Though the central bank may do some token cuts, all these lead to an uncertainty regarding the pace and magnitude of interest rate easing,” Rupa Rege Nitsure, chief economist at the Bank of Baroda (BoB), said.

Mukherjee has estimated a fiscal deficit of 5.1 per cent (lower than 5.9 per cent in this fiscal) of the gross domestic product (GDP) for 2012-13.

However, according to Rohini Malkani and Anushka Shah, economists at Citigroup, the fiscal deficit for 2012-13 could overshoot targets by around 40 basis points to 5.5 per cent of GDP as there could be slippages in both revenues and expenditure.

“While the numbers for food and fertiliser (subsidies) seem realistic, estimates for fuel are conservative,” they said, indicating that the government will have to raise fuel prices if it does not want to see slippages on the fuel subsidy front.

“A loose fiscal policy and high levels of suppressed inflation (low fuel prices and power tariffs relative to market levels) may preclude the RBI from taking a very benign view of inflationary expectations,” says a note by Kotak Institutional Equities. The report said the apex bank would be restricted from bringing down the repo rate to below 7.5 per cent from 8.5 per cent.

However, Samiran Chakraborty, chief economist and head of research at Standard Chartered Bank, told The Telegraph that the RBI would look at the March inflation number. Chakraborty maintains that the repo rate can be cut in April if core inflation falls below 5 per cent. He adds that the RBI will not be hasty in drawing conclusions vis--vis the fiscal consolidation plans of the finance minister, and it will watch the progress for the next few months to see whether the promises made in the budget are getting delivered.

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