FM hints at rate review in July

Finance Minister Pranab Mukherjee today hinted that the Reserve Bank of India (RBI) may not increase key policy rates before its next monetary policy review due on July 27.

The RBI will decide on rates taking into account all factors, including the increase in fuel prices, in its monetary policy review, Mukherjee told a conference of chief ministers of western states and the heads of public sector banks in Mumbai.

Double-digit inflation of 10.16 per cent in May, followed by last Friday’s increase in prices of petrol, diesel and liquefied petroleum gas (LPG) had raised apprehensions of economists and bankers that RBI may go in for a rate hike soon to contain inflation.

Mukherjee said the rise in fuel prices would add 0.9 per cent to inflation and it would have a cascading effect, as the cost of transport, among other things, would increase. But, according to him, the impact will be short-term and the higher fuel prices will be absorbed in due course. The finance minister said he expected inflationary pressure to moderate by the middle of July.

“So, we have taken that risk, there is no doubt. After all, enhancement of oil prices is always an unpleasant decision,” Mukherjee said. “But, this unpleasant decision we had to take, there were hardly any options, we had to do it.”

The measure wouldn’t affect the fiscal deficit, as it was a move to meet the under-recoveries of oil marketing companies, he said.

RBI had raised its key repo and reverse repo rates by 25 basis points each in March and April to 5.25 per cent and 3.75 per cent, respectively.

The government had on Friday raised prices of petrol by Rs 3.5 a litre, diesel by Rs 2 a litre and LPG by Rs 35 a cylinder, as part of its move to deregulate prices of petrol and petroleum products.

The finance minister hinted that the government’s borrowing programme would remain unchanged.

“When the finance minister presents his budget, he takes all the probable resource mobilisation,” he said. “If I have got some money from 3G auction, please remember, my requirement is such a huge amount...5.5 per cent is the fiscal deficit, my borrowing programme is nearly Rs 4 lakh crore.”

The yield on 7.8 per cent bonds maturing in 2020 fell 6 basis points to 7.59 per cent today. Mukherjee’s comments came after the close of trading.