Anand Adhikari
Reserve Bank of India (RBI) Governor D. Subbarao is expected to
reduce the repo rate, the rate at which it lends to banks, by 25 basis points at the bank's next policy review meet on March 19.
This is in the wake of the fiscal roadmap laid out by the government. Finance minister P. Chidambaram has set a fiscal deficit target of 4.8 per cent for 2013/14.
FROM THE MAGAZINE: The many faces of P Chidambaram The news on
the inflation front is encouraging though not cause for celebration yet.
The Consumer Price Index (CPI) - inflation at the retail level - is still sticky, ending the month of February at 10.90 per cent against 10.79 per cent in January.
In the economic survey released last month, the government talked about inflation danger in food items such as cereals, which has gone up substantially in the last few months. In earlier years food inflation was pushed up by higher-protein food items such as milk, for example.
Wholesale Price Index (WPI) or wholesale inflation, however, has also moved up slightly,
at 6.84 per cent, in February, against 6.54 per cent a month ago. One of the facts that has driven up inflation is LPG and diesel prices.
There are two comforting factors.
First, core inflation is below 4 per cent, which is well within the comfort zone of the RBI. The second positive factor is the fiscal deficit has to be contained at 4.8 per cent as indicated by the finance minister
in his budget.
At a recent seminar, the RBI Governor indicated that he was happy the government was embracing a fiscal consolidation roadmap, which he will, in all probability, reciprocate by reducing the repo rate by 25 basis points.
MUST READ: Will Subbarao take cues from govt's fiscal action? The case for a rate cut is also due to growth falling to 5 per cent. Lower interest rates could go some way in generating growth momentum.
On January 29 this year, the central bank cut the repo rate by 25 basis points to 7.75 per cent. Last April, it had lowered the rate by 50 basis points. Over the last year, it also reduced the Cash Reserve Ratio (CRR) and provided liquidity to the banking system through open market operations.
But there are risks, too.
With general elections due in 2014, the government is expected to spend as much as it can to please people.
Clearly, there are also long-term structural issues in the economy that the government has to address, especially on supply side issues, to contain inflation.
In addition, the government's decision to adjust diesel prices on a monthly basis by nearly 50 paise per litre will put pressure on WPI inflation numbers. Pressure will also build on banks to reciprocate by reducing interest rates.
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