India Government Seeks Lower Rates as More Overhauls Planned

Indian Finance Minister Palaniappan Chidambaram
Indian Finance Minister Palaniappan Chidambaram. Photographer: Tomohiro Ohsumi/Bloomberg

India’s finance officials are seeking lower interest rates from the central bank to revive growth as the government plans adding to its overhaul of economic policies.

Inflation may slow to within the Reserve Bank of India’s comfort level by March as the rupee rises and the fiscal gap shrinks, Economic Affairs Secretary Arvind Mayaram said in an interview yesterday. Finance Minister Palaniappan Chidambaram said two days earlier he plans reform measures for capital markets, insurance, banking and infrastructure within weeks.

“We hope that the RBI will be more benevolent with its policy” if it’s convinced the government is taking credible steps to lower the fiscal deficit and contain inflation, Mayaram said in Tokyo, where he participated in annual meetings of the International Monetary Fund along with Chidambaram. “They should give” some signals before March, he said.

Indian policy makers are trying to bring growth back from near the lowest in three years, with the International Monetary Fund saying last week the outlook for Asia’s third-largest economy is unusually uncertain. The government has revamped economic policy since Chidambaram, 67, became finance minister on July 31, opening up to more investment from abroad and raising subsidized diesel prices to tackle a budget deficit.

The push snapped months of gridlock over how to revive the economy, helping the rupee rebound from a record low.

Rupee Outlook

Mayaram said he expects the rupee to strengthen to 50 to 51 per dollar in a couple of months, compared with 52.82 last week. It has surged more than 4 percent against the dollar in the past three months, buoyed by the biggest opening of the economy to overseas companies in a decade.

“I think the rupee must appreciate a little more,” Chidambaram said in a Bloomberg Television interview in Tokyo on Oct. 12. “It has appreciated about 5 or 6 percent in the last few weeks, but I think the rupee must find a reasonable level, its true level.”

Inflation accelerated to a 10-month high in September after an increase in diesel prices. The wholesale-price index rose 7.81 percent from a year earlier, after climbing 7.55 percent in August, the Commerce Ministry said in a statement today.

The pace of Indian price increases is the fastest in major emerging markets and above the central bank’s comfort level of about 5 percent. Inflation hasn’t been tamed yet and supply constraints are adding to price pressures, Chidambaram said.

A further advance in the rupee will help to curb the increase in costs, he said. The central bank can’t be expected to bear the burden of containing inflation by itself, the finance minister said.

‘Tame Inflation’

“When fiscal policy and monetary policy act in tandem and supply improves and the rupee appreciates a little more, I think we will be able to tame inflation,” Chidambaram said. Inflation may slow to 5 percent to 5.5 percent by March, Mayaram said.

“The crucial link as the finance minister mentioned is that inflation should come down and that is not happening,” said Prasanna Ananthasubramanian, an economist at ICICI Securities Primary Dealership Ltd. in Mumbai. “They will not touch the repo rate but will ensure comfortable liquidity so that banks have an incentive to expand credit.”

Governor Duvvuri Subbarao left the benchmark repurchase rate unchanged at 8 percent for a third meeting in September, after cutting it from 8.5 percent in April. The Reserve Bank has signaled that curbing the fiscal deficit may boost scope to join emerging nations from South Korea to Brazil in extending rate cuts this year.

Budget Gap

India’s budget deficit is the widest among major emerging nations as slower growth hurts tax receipts and subsidies fan spending, imperiling the government’s goal of narrowing the gap to 5.1 percent of gross domestic product in the 12 months through March 2013, from 5.8 percent the previous fiscal year.

The budget gap may be about 5.2 percent to 5.3 percent this fiscal year, missing the 5.1 percent target, Mayaram said.

Prime Minister Manmohan Singh’s government announced the first increase in diesel prices in more than a year on Sept. 13, after Chidambaram pledged to contain a fiscal shortfall that has put the nation’s investment-grade credit rating in jeopardy.

The administration opened industries including retail and aviation to more foreign investment the next day, and this month decided to seek parliamentary approval for more overseas participation in the insurance and pension businesses.

The burst of changes, which snapped months of political gridlock over how to rejuvenate the economy, cost the ruling Congress-party led coalition its majority in both houses of parliament after a key ally withdrew support.

IMF Forecast

Singh is gambling that the long-delayed opening measures will revive growth in time to salvage Congress’s fortunes before a general election due by May 2014. The IMF forecasts India’s gross domestic product to rise 4.9 percent in 2012, the least in a decade.

Chidambaram said he’s “absolutely certain” that India’s credit-rating won’t be downgraded, and added that the budget for the year through March 2014 would be neither populist nor austere.

“We must have a budget that emphasizes fiscal consolidation and incentivizes savings, promotes investment and cuts out wasteful expenditure,” he said. He also said that key social welfare programs will be fully protected.

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