High fiscal deficit makes rate cut undesirable : Montek

High fiscal deficit makes rate cut undesirable
After 13 straight rate hikes in around two years, and then a pause and then a CRR cut with open market operations (OMOs), the Reserve Bank of India (RBI) is again set to meet on March 15 to review monetary policy. Markets as usual are expecting the RBI to start reversing the tight monetary policy as economic growth has witnessed recent lows.

But, the Prime Minister's Economic Advisory Council (PMEAC) thinks different and yet logical.

PMEAC's deputy chairman says that as long as fiscal deficit remains above the comfort zone, it won't be desirable to cut interest rates, as it would further serve against the target of RBI to reduce inflation.

Even RBI's Governor D Subbarao, in his monetary policy review report of January 24, had said that the government's loose fiscal policy is fuelling consumption and thereby offsetting RBI's efforts to reduce inflation through its rate hikes.

The fiscal deficit of India is seen rising to 5.6% of GDP at the end of current fiscal as against the target of 4.6%. Ahluwalia also said, "The determinants of long-term interest rates in India are really going be things like what happens to fiscal deficit and what happens to funds outside the country, which will determine general liquidity".

Given Ahluwalia's comments, it seems like that rate cuts in 2012 are possible but timing is uncertain. And the timing would depend mainly on two factors that include level of fiscal deficit and the condition of inflation.

Also since the budget draws closer, the Finance ministry has remained tight-lipped over measures to reduce fiscal deficit. But it is for sure that the Finance Minister can't neglect tough measures to do that this time.

Dion Global Solutions Ltd

Read more about: fiscal, monetary, gdp, rbi, crr, economy
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