The Reserve Bank of India is scheduled to announce its mid-quarter review of monetary policy on Monday. Now that the Government has given a big push to reforms in various sectors, will the RBI respond by lowering key rate(s)? Or will it run the Government out?
Most economists and bankers are sceptical. But the Finance Ministry is optimistic, pinning hopes on the RBI’s statement of July 30 on “Macroeconomic and Monetary Developments First Quarter Review”. It had said: “Decisive policy action, backed by credible commitment to a long-term strategy for correcting macroeconomic imbalances and stimulating investment, is crucial at this stage to revive confidence as well as provide space for monetary policy to help sustain growth while keeping inflation under control.”
A senior Government official says some key policy decisions have been taken but inflation is not in the comfort zone of the RBI. But it could nevertheless think of cutting rates, especially keeping the dismal industrial growth in mind. The IIP grew by just 0.1 per cent in July.
Even the Deputy Chairman of the Planning Commission Montek Singh Ahluwalia said recently, “There is no doubt that adjustment (read hike) in diesel prices creates a fiscal space. This signal is good and the RBI will take this signal.”
The Government official also clarified that the latest decisions are part of a credible action plan. The Finance Ministry, on August 7, had indicated that it would come up with one such plan within six weeks to encourage the RBI to cut interest rates in the mid-quarter review of monetary policy.
This indication came within 24 hours of the Finance Minister P. Chidambaram’s first official statement.
Now all eyes are focused on the implementation of Kelkar Panel report on fiscal consolidation. The panel has submitted its report and the Government is studying it.
This plan is two-fold. First raising resources through disinvestment and secondly cutting the non-Plan expenditure. The aim is to keep the fiscal deficit within 5.3-5.4 per cent against the budgetary target of 5.1 per cent.
“Clarity on these issues will help the RBI take a call on interest rate,” the official added.
Some expenditure reduction measures by the Government are also expected on Monday.