Moscow: The Reserve Bank of India’s move to raise two of its interest rates while keeping the main repurchase rate unchanged doesn’t signal a shift toward a tightening bias, finance minister P Chidambaram said.
What I think the central bank did a few days ago is not to be understood as affecting the policy rate one way or another, Chidambaram said in an interview on Saturday in Moscow, where he’s attending a meeting of Group of 20 finance ministers and central bankers. That decision will be taken separately.
India’s government is trying to steady the nation’s currency, which has weakened about 7% versus the dollar in 2013, as the possibility of reduced US monetary stimulus undercut demand for emerging-market assets. RBI governor D. Subbarao increased the bank rate and the marginal standing facility rate on 15 July and capped daily fund injections via repo contracts.
India’s government has changed policies since September to fight the weakest economic growth in a decade and avert a credit-rating downgrade before a general election due by May 2014. The rupee sank to a record low 61.2125 per dollar on 8 July and was the world’s worst performing currency in June.
The central bank’s move to increase two of its rates was met with warnings by some economists that it will result in tightened liquidity conditions at a time of lackluster growth. The RBI’s next policy meeting is on 30 July.
We think there’s a good chance we can grow close to 6%, Chidambaram said. Basically next only to China, India is the largest growing economy.
Asia’s No. 3 economy expanded 5% last fiscal year, the weakest pace since 2003, and below the 10-year average of about 8%. The economy will probably grow 6.1% to 6.7% in the year through March 2014, according to a survey by India’s finance ministry in February.
The RBI left the monetary-policy benchmark, the repurchase rate, unchanged in June after the rupee’s drop threatened to make imports costlier. Consumer-price inflation was 9.87% last month, while wholesale inflation accelerated to a three- month high of 4.86%.
The government is trying to combat the slowdown with reforms that included loosening foreign investment rules in the aviation and retail businesses and easing caps and levies on purchases of local bonds by investors abroad. Restrictions in other industries are also set to be eased.
We expect that inflows will resume, Chidambaram said.
When asked about the government’s plans to consider issuing debt abroad or selling bonds to non-resident Indians, Chidambaram said our options are on the table, no decision has been taken.
Chidambaram said he didn’t think the Food Security Bill enacted earlier this month will adversely affect the fiscal deficit.
When the budget is made for the next year or the years after, this expenditure will be taken into account and the budget will be drawn up accordingly, he said.
Under the food bill, 67% of India’s 1.2 billion people may be entitled to buy wheat, rice and coarse grains at subsidized rates. The plan involves estimated spending of Rs1.25 trillion ($21 billion) in a full financial year at current prices.
I think the fiscal deficit consolidation plan is a well laid-out plan and we do not intend to breach the red lines in that plan, Chidambaram said.