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Delhi stance to weigh on RBI policy

Mumbai, Oct. 3: The Big Bang reforms unleashed by the government in recent weeks could play a role in shaping the Reserve Bank of India’s monetary policy.

Ever since the government stepped on the pedal and accelerated the pace of reforms — with a strong thrust at fiscal consolidation — there has been speculation that the monetary policy wonks at Mint Road could respond to the cue by cutting interest rates.

RBI deputy governor Subir Gokarn today indicated that the central bank would consider the implications of the recent decisions taken by the government at its second quarter review of the monetary policy on October 30.

With the economy shuddering into a slowdown, the finance ministry and industry have been indicating that the time is ripe for another cut in the policy rates.

However, the RBI has refrained from cutting the rate-signalling repo rate because of worries that inflation could climb this year. The repo is the rate at which it lends money to banks against collateral bonds.

In its mid-quarter review of monetary policy last month, the RBI disappointed many when it left the repo rate unchanged at 8 per cent but brought down the cash reserve ratio by 25 basis points to 4.50 per cent.

However, recent reform measures taken by the Centre have instilled optimism in some circles that RBI governor Duvvuri Subbarao may cut the repo rate.

Since the RBI has been harping upon the point that further interest rate cuts will also depend on fiscal consolidation by the Centre, the latter’s steps have now put the ball in the court of the apex bank.

Speaking at the annual general meeting of the Southern India Chamber of Commerce & Industry in Chennai today, Gokarn said that while the hike in diesel prices would add to near-term inflation, it would control the country’s fiscal deficit.

According to the deputy governor, the RBI will see how the latest measures announced by the Centre will influence the growth-inflation trajectory.

Bankers reacted with caution to Gokarn’s remarks. “It certainly improves the chances of a rate cut, but much will depend on how inflation pans out,” said a senior official with a private bank.

 
 
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