RBI likely to announce rate cut May 3rd
By R Chandrasekaran
The finance minister P Chidambaram has been advocating slashing of interest rates time and again in an effort to push the economic growth, which has reached a ten-year low with the December quarter having been the worst quarter in four years. Now that the inflation has eased, the chief economic advisor too sees there is enough room for the Reserve Bank of India to cut interest rates.
The comments assume significance thus suggesting the government side thinking even as the RBI is slated to meet on May 3 for annual monetary policy. Though the central bank accepts the government as a major stake holder, it failed to meet the government’s opinion at least on a couple of occasions in the last one year citing lack of efforts to control the fiscal deficit.
Though the government had managed to contain the fiscal deficit in the fiscal year 2012-13, the fact is that it came on the back of a lower spending than the original budgeted figure. The government’s revised plan expenditure was Rs.4.29 trillion as per its budget proposals, which was lower than the originally budgeted figure of Rs.5.21 trillion for the fiscal year 2012-13. The revised estimate was about 2.7 percent lower than the Rs.4.41 trillion revised budget estimate in the previous year, i.e. 2011-12.
The reduction in plan expenditures only reduces government spending on capital expenditure, which was not considered as favorable indicators for growth prospects. The government is targeting 6.4 percent economic growth in the current fiscal year ending March 2014. However, the RBI Governor Dr. SubbaRao had earlier indicated that India had the potential to deliver much higher growth.
During an event in Delhi on Friday, RaghuramRajan, Chief Economic Advisor, said that with the inflation reaching a three-year low of 5.96 percent in March compared to the RBI’s estimation of 6.8 percent, there is enough room for interest rates cut. He further added that the Rabi crop is likely to be better one and has the potential to bring down inflation.
The cooling off of oil price and the recent drop in gold price is likely to benefit in reducing current account deficit to an extent as the foreign exchange outflow is likely to be lower.
Ever since the March inflation data was out, there has been a strong clamor for rates cut. Trade bodies such as Federation of Indian Chambers of Commerce and Industry, Associated Chambers of Commerce and Industry, and Confederation of Indian Industry have been seeking interest rates cut of up to one percentage point.
While the RBI is likely to announce rate cuts in the May 3 meeting, analysts and experts are expecting 25 basis points reduction in interest rates. The stock market has been buoyed by strong hopes of rate cuts. However, whether the RBI will please all sections of the society remains a question mark since the predictions between analysts and expectations from trade bodies are wide.
To contact the author, e-mail:Â rchandrasekaran@americanbazaaronline.com