Lowering of rates depends on fiscal deficit: Montek

New Delhi: Amid demand for softening of monetary policy to promote growth, the Plan panel today said any move by Reserve Bank to lower interest rate will mainly depend on the government’s ability to contain fiscal deficit.

“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 will lower the repo rate,” Planning Commission Deputy Chairman Montek Singh Ahluwalia said here at an Assocham conference.

[caption id=“attachment_224397” align=“alignleft” width=“380” caption=“Indian Planning Commission Deputy Chairman Montek Singh Ahluwalia”]  [/caption]

India’s fiscal deficit is expected to be 5.6 percent of Gross Domestic Product (GDP) this fiscal as against the budget estimates of 4.6 per cent of GDP. The central bank is expected to take more steps in its policy review on March 15 to ease liquidity situation to promote economic growth which is expected to moderate to 6.9 percent in the current fiscal from 8.4 per cent a year ago.

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The Reserve Bank in its last policy review reduced Cash Reserve Ratio, the money the banks are required to maintain with the central bank, by 0.5 percentage point to 5.5 per cent to release Rs 32,000 crore of primary liquidity into thesystem.

RBI has raised the key interest rate 13 times since March 2010. 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”.

He expressed concern over that the mounting current account deficit (CAD) and said, “Can India finance CAD of 3 percent of GDP, which is about USD 15 billion a year inflow?” CAD is a reflection of gap between foreign exchange

inflows and outflows and is estimated to be 3.6 per cent of GDP.

“Now inflows from all sources like FII, FDI will finance current account deficit. It is very difficult to judge prospects right now simply because there is huge uncertainty internationally,” Ahluwalia said.

Earlier on Wednesday, the Prime Minister’s Economic Advisory Council (PMEAC) Chairman C Rangarajan had said efforts should be made to limit CAD to 2-2.5 percent.

“While the position in regard of capital flows has greatly improved, it will however be judicious to try and limit the CAD…especially as long as international financial markets continue to be adversely impacted by the troubles in the Eurozone”.

However, after release of PMEAC’s economy review, Finance Minister Pranab Mukherjee yesterday exuded confidence that the government will be able to manage the situation by stepping up exports.

“CAD is a matter of concern. I think we will be able to manage CAD because our export basket and destinations are getting diversified … with the introduction of new manufacturing policy I do hope exports should get a boost,” Mukherjee had said.

PMEAC has projected CAD at 3.6 per cent of GDP in the current fiscal and 3 percent in 2012-13. It stood at 3.6 percent during April-September of this fiscal.

PTI