New Delhi: The government's ability to contain India's large fiscal deficit will determine the Reserve Bank of India's (RBI) move to lower interest rates, Planning Commission Deputy Chairman Montek Singh Ahluwalia said.
"Interest rate is going to be determined predominately by what happens to the fiscal deficit. The industry is convinced that no matter what happens to fiscal deficit, the RBI (Reserve Bank of India) will lower the repo rate," Ahluwalia said Friday during an event.
The RBI has raised key policy rate, or repo rate, by 375 basis points in 13 sequential steps since March 2010 to tame stubbornly high inflation, which remained above 9% for 12 months in a row till November, until it pressed the pause button on rate hike cycle in December to address concerns about economic growth.
In January 2012, the RBI cut cash reserve ratio (CRR) -- the portion of deposits that banks are required to keep with RBI -- from 6% to 5.5%, thereby infusing Rs 320 billion into the system, while keeping key policy rate on hold to arrest inflationary pressures.
Top government officials, including Prime Minister's Economic Advisory Council (PMEAC) Chairman C Rangarajan and Ahluwalia have said that India is likely to miss meeting the 4.6% fiscal deficit target by about 100 basis points in this fiscal year 2011-12.
Last week, the PMEAC had pegged India's current account deficit at 3.6% of the gross domestic product (GDP) for this fiscal, a level worse than the 3% seen during the 1991 balance of payment crisis.
Earlier Thursday, RBI Governor D Subbarao had said that India's large fiscal deficit will crowd out private credit if the government does not make efforts to reduce it, as opposed to previous beliefs that a huge budget gap has not edged out private credit.
Notably, the RBI has on several occasions raised apprehensions over the widening fiscal gap on account of increased government borrowings and loose fiscal policy, saying that a higher fiscal deficit will have inflationary implications due to decline of revenue receipts and rise in expenditure.
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