Modi govt’s expansionary budget is bound to pose a challenge for RBI Governor Shaktikanta Das, who’s chairing his first Monetary Policy Committee meeting.
New Delhi: India is calling on its central bank to cut interest rates to fire up the economy, after a federal budget announced steps to spur consumption.
The Reserve Bank of India will “hopefully” reduce policy rates by a quarter percentage point and switch to a neutral stance, Rajiv Kumar, vice chairman of government think-tank NITI Aayog, said in an interview after last week’s budget that focused on boosting the rural economy and real estate sector.
“This is the right time for RBI to think about a rate cut and give investment a boost so that all engines start firing,” said Kumar, an adviser to Prime Minister Narendra Modi. “The ball is in the RBI’s court.”
The central bank, which last year adopted a calibrated tightening stance after back-to-back rate increases in June and August, has reasons to abandon its hawkish bias: inflation is at an 18-month low, consumer demand is cooling and global risks are mounting. Still, the government’s expansionary budget is bound to pose a challenge for Governor Shaktikanta Das, who’s chairing his first Monetary Policy Committee meeting that began Tuesday. The decision is due to be announced Feb. 7.
The government widened its fiscal deficit targets for the current financial year and next to 3.4 percent of gross domestic product. It plans to borrow more to fund populist measures, such as a $10.6 billion-aid for farmers — seen as key to winning votes for Modi’s Bharatiya Janata Party in a national election due by May.
“If the RBI can help, you will get much higher growth rates,” Kumar said, adding the time is ripe for a cut in key interest rate due to low food and crude oil prices.
What our economists say…
“We expect the RBI to cut its policy repo rate by 25 basis points and adopt a neutral stance at its Feb. 7 meeting, pulling back from what we think was a hasty switch to calibrated tightening in October last year.”– Abhishek Gupta, Bloomberg Economics Read More: RBI Has Room to Make a One-and-Done Rate Cut
Here are Kumar’s comments on other key issues:
Everyone, including multilateral institutions, expect India’s growth rate to exceed 7 percent. The capital stock isn’t rising much. “If you say there are job losses where is this growth coming from,” Kumar said in response to criticism about lack of generation of employment.
The statistical system needs to be revamped to ensure the surveys capture the rising trend of self-employment, he said, adding the survey questions should be rephrased to ask respondents: “Are you earning an income or not,” instead of asking “are you in a job or not?”
The focus will be more on strategic sales, and the NITI Aayog is involved in recommending the candidates for divestment of stake. “We want to put an end to hemorrhaging by loss-making state-run companies,” said Kumar.
There’s a need to estimate borrowing requirement of state-run entities. The goal would be to rationalize the borrowing and leave more for the private sector, which likely will also bring down interest rates, according to Kumar. –Bloomberg
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