The Telegraph
Monday , August 11 , 2014
CIMA Gallary

Jaitley rate cut nudge to RBI
Policy of inflation control on test

Jaitley and Rajan in New Delhi on Sunday. Picture by Ramakant Kushwaha.

New Delhi, Aug. 10: The Narendra Modi-government wants the Reserve Bank to cut rates to help ease the economy, struggling to get over a two-year slowdown.

After a meeting with the RBI board, where a new monetary policy framework, including measures to reduce retail inflation, were discussed, finance minister Arun Jaitley said the government preferred interest rates to soften to ease the investment cycle and push the economy towards a higher growth.

“I... (have) already issued a clear statement (after the RBI came out with its credit policy last week). This an issue that the RBI decides and I am sure they factor in various circumstances,” Jaitley told reporters after addressing the central board of the Reserve Bank of India here.

Soon after the RBI announced its credit policy on August 5, Jaitley had said inflation was moderating and “the RBI should examine the liquidity situation, inflation and growth in setting policy rates”.

The consumer price index had spiked to 11.2 per cent last November before three interest rate hikes from Rajan helped to bring inflation down to 7.3 per cent in June.

The RBI has followed a hawkish policy of keeping interest rates high to try to tame a stubborn inflationary trend. In its policy review last week, the RBI retained the policy rate at 8 per cent as it felt the risk of inflation remained. An 8 per cent lending rate for overnight loans by the central banker to commercial banks translates into retail loans at interest rates ranging from 12-16 per cent.

Officials say the RBI’s intentions to target a consumer inflation rate of 8 per cent by January 2015 and 6 per cent by January 2016 meant the central banker would be loath to cut rates till it saw progress on inflation coming down.

Many feel the RBI’s stance on retaining high interest rates could bring it on a confrontation path with the government, which would like an equal emphasis on growth.

“We will be discussing the monetary policy framework through the course of the year. Just now we have started a preliminary discussion,” RBI governor Raghuram Rajan said after the board meeting, indicating that the contours of the monetary policy, including inflation targeting, were up for debate.

An RBI release quoted Jaitley as saying the “policy regime is being geared towards attaining higher growth, lower inflation and sustainable external balances”.

Jaitley said the central bank would take a final call on its 6 per cent inflation target by March 2016. “It is an issue which the Reserve Bank (of India) decides and I am sure they factor in various circumstances,” the minister said.

A weak monsoon and the possibility of a hike in global oil prices because of renewed tension in West Asia and Ukraine have compounded the problems of the RBI even as it prepares the monetary policy in prior consultation with the government.

Deficit trouble

The government’s borrowing programme and revenue mop-up also play a role in the monetary policy.

Fiscal deficit has reached 56.1 per cent of its projected full-year target in the first quarter of the financial year. The government aims to contain fiscal deficit at 4.1 per cent of the gross domestic product in the current fiscal year, a target which the finance minister has admitted is challenging. Over-spending may force the government to borrow more, making it tough to contain inflation or reduce interest rates.

However, Jaitley said the numbers don’t project a correct picture. “Don’t go by the percentage and the number of months. In the initial months, there is a carry over (of expenditure and refunds) from the previous year. Also, direct tax collections will pick up by September. It will even out as the year proceeds,” he said.

Jaitley also referred to non-tax realisations, which could give him the much needed cushion to check the deficit. He said the government’s divestment plan was on track with the concerned department proceeding with the appointment of advisers for PSU share sales. The government plans to collect Rs 58,425 crore from stake sales in state-owned units in this fiscal.