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Interest rate cuts may hit slow lane

Govt expects to achieve fiscal deficit target of 4.1% of GDP for FY16

BS Reporter  |  Mumbai 

As the government’s fiscal-consolidation plan has been pushed by a year, the Reserve Bank of India (RBI) is expected to be cautious in further easing its monetary policy stance. As a result, market is now factoring in a reduction of only 50 basis points in 2015, against 75-100 bps expected earlier.

Though Finance Minister Arun Jaitley said the government would achieve its fiscal deficit target of 4.1 per cent of gross domestic product (GDP) for 2014-15, he eased the target for next year to 3.9 per cent from the 3.6 per cent envisaged in the road map given last year by the previous government. Accordingly, the total borrowing requirement for 2015-16 has been budgeted at Rs 5.56 lakh crore, compared with Rs 5.92 lakh crore for the current year..

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“From the rate cut point of view, the is a little disappointing. They have not dealt with some of the fundamental issues of revenue deficit and are still relying too much on disinvestments for meeting the fiscal deficit target. Inflation might continue to come down, but RBI could continue to go slow on rate cuts,” says Arvind Sethi, managing director & chief executive of Tata Asset Management.

RBI’s first bi-monthly monetary policy review for 2015-16 is scheduled for April 7.

In January, RBI began its rate-cutting cycle with a 25-basis-point reduction in repo rate, to 7.75 per cent. Governor Raghuram Rajan had then said further easing would depend on data confirming a continued disinflationary trend. Also critical would be sustained high-quality fiscal consolidation, as well as steps to overcome supply constraints and assure availability of key inputs like power, land, minerals and infrastructure.

“The government has not been able to stick to the 3.6 per cent target. This is not a big issue, but why would anyone believe they will, after delaying the larger timeline, achieve the three per cent target in two years? It is a question of credibility. So, there is some disappointment. The Fiscal Responsibility and Management (FRBM) Act and rules do not have any sanctity,” says A Prasanna, chief economist, ICICI Securities Primary Dealership. The fiscal deficit is proposed to be narrowed to three per cent by 2017-18, a year later than earlier planned in the FRBM Act.

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First Published: Sun, March 01 2015. 00:44 IST