Home >Politics >Policy >Arun Jaitley pushes case for more rate cuts before Raghuram Rajan review

Sydney: Finance minister Arun Jaitley made the case for more interest rate cuts a week before India’s central bank reviews policy, saying that a reduction in borrowing costs would help bolster Asia’s third-biggest economy.

Banks will soon be in a better position to lower “high" interest rates after the central bank took steps to improve transmission after four rate cuts last year, Jaitley said in an interview with Bloomberg TV in Sydney on Wednesday. The government has also reduced rates on small savings programs that compete for deposits with commercial banks.

“At this stage if rate cuts do take place it’s certainly going to be helpful because you need a more efficient economy and you need a more competitive cost of capital," Jaitley said.

With Prime Minister Narendra Modi embracing fiscal discipline in last month’s federal budget, the focus is on whether central bank governor Raghuram Rajan will reciprocate with a rate cut to bolster an economy that is showing mixed signs of strength. Most economists in a Bloomberg survey see Rajan cutting the key rate by 25 basis points on 5 April, the first monetary policy review after the budget.

100 years

Rajan said last month he would assess price gains and the budget before his next rate decision as he looks to hit a 5% inflation target by March 2017. Consumer prices rose 5.18% in February, a slower pace than estimated.

Jaitley said the economy could grow even stronger than the forecast of 7% to 7.75% in the next fiscal year if India had a good monsoon and global growth picked up. India faced back-to-back droughts for the first time in three decades, making life difficult for roughly 70% of the nation’s 130 crore people who live in villages.

“Hopefully if we have a better monsoon this year — India’s never had three bad monsoons in the last 100 years — we could improve," Jaitley said.

India’s exports have fallen for a record 15 months, prompting exporters to call for a weaker currency. The rupee has strengthened 3.1% in March, set for the best monthly gain in two years, after slipping 3.3% in the first two months of the year.

Rupee pressure

Jaitley said the market would decide the right price for the rupee, echoing comments made earlier this month by Modi.

“There is a pressure from exports to keep it competitive, there is a pressure from politics to make it stronger," Jaitley said. “Therefore discretion is that the rupee finds its own level."

The government retained its target of bringing the budget shortfall to 3.5% of the gross domestic product (GDP) in the year that starts 1 April, the smallest gap since 2008. The deficit will be 3.9% of GDP in the current fiscal year.

Rajan had warned of higher bond yields if Modi’s government strayed from the fiscal consolidation path, calling macroeconomic stability India’s “single most important strength" in a time of global market turmoil. Bloomberg

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