Inflation down, FinMin bats for rate cut

Inflation-indexed bonds to be launched by May, says Economic Affairs Secretary Mayaram

Ahead of the Reserve Bank of India’s (RBI) annual policy review, scheduled on Friday, the finance ministry today made a fresh pitch with the central bank to cut the key policy rate.

Arvind Mayaram, secretary, department of economic affairs today said, “Inflation is falling… (so) we would be happy if RBI continues the trend of softening the rates”.

RBI had reduced the key policy rate in the last two policy meetings by 25 basis points (bps) each. The cash reserve ratio (CRR), too, was brought down by 25 bps in the January policy. Wholesale price index-based inflation in March was 5.96 per cent, the slowest pace of growth in three years. In February, headline inflation was 6.84 per cent.

Most analysts are also of the opinion that with inflation coming down, RBI would reduce the policy rate by at least 25 bps. According to some analysts, the rate cut could even be as sharp as 50 bps.

Mayaram also said there would be a bumper rabi crop this year, which would further help inflation to fall. “With an expected output of 250 million tonnes… I see no reason why inflation should not continue to fall,” he said on the sidelines of a conference organised by the Federation of Indian Chambers of Commerce and Industry and Asian Development Bank.

Inflation-indexed bonds are expected to be launched in May, Mayaram added. “RBI is working on the details and they will come out with the programme on the issuance of these bonds.” These bonds were announced by Finance Minister P Chidambaram in this year’s Budget. He said, “Such bonds will help channel middle class savings into financial instruments and also reduce the dependence on gold, considered a hedge against inflation.”

During his speech at the conference, he expressed the confidence India would be able to grow over six per cent this year. “In the next year, we will grow seven-7.5 per cent and year after that, we are quite confident that the economy will go back to its potential growth rate of eight per cent.”

On the other hand, the World Bank today lowered the country’s growth forecast for FY14 to 6.1 per cent from seven per cent, announced earlier. The government is also working to clarify the definition of foreign direct investment and foreign institutional investment, he added. “There are some grey areas... so there has to be a clear definition of the two.”

Mayaram further said the current account deficit (CAD) could be financed through capital inflows and, therefore, we need to increase the foreign direct investment (FDI) inflow, a long-term capital. He added the government was reviewing FDI policy in all sectors.

The finance ministry had recently met representatives of global rating agencies Fitch and S&P to press for rating upgrade. The ministry is supposed to meet representatives of Moody’s in the next few days. Asked on ratings upgrade by the agencies, Mayaram said the case had been presented before these and the government’s determination to continue taking reform measures would be factored in by the agencies.