India’s rupee appreciation and steps by the government to reduce the fiscal deficit will provide scope for the central bank to lower interest rates before March, Economic Affairs Secretary Arvind Mayaram said.
Price increases may moderate to within the Reserve Bank of India’s comfort zone by March as the currency rises and the government narrows the fiscal gap, Mayaram said in an interview with Bloomberg Television in Tokyo today. He said inflation may ease to 5 percent to 5.5 percent by March. Wholesale prices increased 7.55 percent in August from a year before.
Prime Minister Manmohan Singh’s government has opened up to more investment from abroad and raised subsidized diesel prices in the past month, part of a burst of policy changes to bolster growth and shrink a budget deficit. Finance Minister Palaniappan Chidambaram said two days ago that the nation needs lower interest rates as an additional force for expansion.
“If the RBI is fully convinced that the steps that are being taken are credible and will result in something like that, then we hope that the RBI will be more benevolent with its policy,” Mayaram said. “It is not necessary for them to wait until March,” he said, adding they should signal before then that they will cut rates.
The rupee has surged more than 5 percent against the dollar in the past three months, the most among major Asian currencies, paring its drop in the past year to 7.3 percent. Mayaram said he expects it to strengthen to 50 to 51 per dollar in a couple of months. It closed at about 52.82 last week.
India’s budget deficit is the widest among major emerging nations as the nation’s weakening in growth hurt 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 fiscal year through March, from 5.8 percent the previous year. The budget gap may be about 5.2 percent to 5.3 percent this year, missing the 5.1 percent target, Mayaram said.
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.
Economic growth is forecast to weaken to a decade-low of 4.9 percent in 2012 after investment stalled, the International Monetary Fund said last week. The outlook for Asia’s third-largest economy is unusually uncertain, it said.
Reserve Bank of India 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 central bank has signaled that curbing the fiscal deficit may boost scope to lower rates.
“The RBI is fully cognizant of the need now to step up growth,” Mayaram said.