The Telegraph
Since 1st March, 1999
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Hint of rate cut in PC-Reddy meet

New Delhi, Sept 28: Reserve Bank governor Y.V. Reddy met finance minster P. Chidambaram today as the inflation rate fell to a near five-year low of 3.23 per cent.

A fall in the price of some food and manufactured items pulled down the rate for the week ended September 15. The rate stood at 3.32 per cent in the previous week and 5.27 per cent in the corresponding week a year ago.

Officials remained tightlipped about the meeting’s agenda. Though Reddy and Chidambaram were meeting soon after the Fed rate cut, officials said the government might go in for a token interest rate cut only if it did not have to increase prices of petroleum products.

Crude oil prices are going up steadily and have crossed $82 a barrel. There are fears of prices touching $85-87, as European countries start booking their winter reserves of oil.

If the spiral persists, India may be forced to raise prices of petroleum products.

The government has kept prices of petroleum products sold by state-run refiners steady as it does not wish to trigger an oil price-led inflation.

Prices have become a political issue with the Left and the BJP organising campaigns.

Earlier, inflation was a deciding factor in elections to state assemblies, where the Congress-led alliance fared badly.

Officials said though the government was slated to release Rs 12,000 crore in oil bonds to the refiners, a further hike in international prices of crude might have to be passed on to the consumers.

“There is a limit to the amount of debt the government can run up on this account,” officials said.

According to a note circulated by the petroleum ministry, even at an average price of $75 a barrel, the government will have to issue bonds worth Rs 24,000 crore this year to make good the losses of refiners.

However, if a political decision is taken to keep oil prices steady, a token cut of a quarter percentage point in key rates could be effected.

Industry is clamouring for cheaper lending rates. Industrial growth has slowed down sharply to 7.1 per cent in July from 13.2 per cent in the same month a year ago. Infrastructure growth has fallen to a near 6 per cent.

However, the RBI also wants to contain the inflation rate at close to 5 per cent this fiscal and, therefore, needs to be cautious about cutting interest rates.

“Inflation is likely to remain around 3.5 per cent till December despite concerns of excessive rainfall in some parts of the country affecting kharif production, and high crude oil prices,” an analyst said.

The RBI has raised interest rates five times since mid-2006; the latest was in March. At a July review, it held rates steady but raised banks' reserve requirements to mop up funds that could fuel inflation. The next review is on October 30.

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