We will walk the path alone, says Chidambaram on growth challenge

After the Reserve Bank of India (RBI) announced that it was leaving interest rates unchanged, a disappointed Finance Minister said: “Growth is as much a challenge as inflation. If the government has to walk alone to face the challenge of growth then we will walk alone.” Mr Chidambaram was referring to the RBI’s stance of reining in inflation before changing key rates to revive flagging growth.

The standoff between the North Block and the central bank over interest rates became more apparent today after the RBI left interest rates unchanged, but cut the cash reserve ratio for banks, and indicated it may ease monetary policy further in the January-March quarter, although inflation remains a near-term concern. The central bank kept its policy repo rate at 8 per cent and cut the cash reserve ratio, or the amount of deposits that banks must keep with the central bank, by 25 basis points to 4.25 per cent.

"As inflation eases further, there will be an opportunity for monetary policy to act in conjunction with fiscal and other measures to mitigate the growth risks and take the economy to a sustained higher growth trajectory," the RBI governor D. Subbarao wrote in his quarterly review.

Arvind Mayaram, the Economic Affairs Secretary, said: "There is a case for an interest rate cut because we needed a signal… eventually the RBI and the government will have to work together.”

“The government is doing its best to send a clear message that we are on the path of fiscal consolidation. It is my hope that everyone will read and understand the government’s commitment to the path of fiscal consolidation. I haven’t read the last few paragraphs of the statement but if it holds out hope for the future I look forward to that future. Sometimes it is best to speak, sometimes to remain silent; this is the time for silence,” Mr Chidambaram added.

“Both the government and the RBI share concerns on growth. Even (the) RBI has concerns about growth and inflation; only, our balance is shifting. If you are asking about the nuances in the Finance Minister’s statement, I think you should ask him,” the RBI governor said at the post-policy press conference. The central bank is looking for a "little more detail" on how the government will implement its fiscal roadmap in the short and medium terms, he added.

At its earlier policy review on September 17, just days after the government took on the might of the opposition as well as allies to announce a host of reform measures, the RBI left its key policy rates unchanged, citing high inflation.

Then, Mr Chidambaram had said: "The response of RBI on October 30 will be far more supportive of growth."

This time around, his disappointment could not have been more obvious.

The stock markets were clearly disappointed with the RBI's decision today, with the Bombay Stock Exchange Sensex plunging 200 points after the central bank announced its credit policy. The benchmark index has stayed at the lower levels through the day.

State Bank of India chairman Pratip Chaudhuri took on the RBI, saying the higher interest rate regime did nothing to rein in high inflation. "Today's inflation is cost push and not demand pull and trying to address that with higher interest rates in not helpful," Mr Chaudhuri said at the bankers' press conference post the RBI policy.

However, not everyone was that critical of the RBI's decision.

"(The) reduction of CRR is a good thing,” said Planning Commission deputy chairman Montek Singh Ahluwalia. “It is to moderate the pressure rates. We need to push growth along with inflation. I don’t want to comment in detail.”

“Monetary policy is an important push for the growth; the fiscal push depends on the consolidation. That’s what the finance minister has said. A sufficient amount has been done to start in the other policy; the RBI itself seems to have indicated that it is looking towards the future,” he added.

Sajjid Chinoy, India economist at JPMorgan, said: "Hats off to the RBI. There was a lot of pressure on the central bank to cut rates, but the data did not justify that. Kudos to them for reiterating that inflation needs to be managed. It is a very balanced statement and reiterates the division on labour—the RBI’s focus on inflation, and the government’s focus on bringing in investment."

"The RBI did indicate that there is perhaps more space to ease policy in the next quarter. But that depends on the growth-inflation dynamics. I am not sure that just a rate cut would be enough to improve sentiment. I would take you to the April review when markets weakened even after a rate cut. We need announcements like land acquisition, etc. A token rate cut would not be enough. Dampening inflation is still their primary focus," he added.

Hopes of a rate cut rose after the RBI yesterday said it would take steps to support growth despite high inflation.

"Monetary policy needs to be cautious in the interim, focusing on inflation while using the available space to support growth to the degree it can," the central bank said in its macroeconomic and monetary development review.

The government vowed on Monday to rein in the country's hefty fiscal deficit, increasing the pressure on the RBI to cut interest rates for the first time since April.

At a press conference on Monday that was unusual for the haste at which it was called and the timing—one day ahead of the RBI's policy review—the Finance Minister unveiled a fiscal consolidation plan that did not say how the government aimed to rein in a ballooning subsidy bill.

Mr Chidambaram pledged to nearly halve the fiscal deficit by March 2017 in a bid to avoid a credit rating downgrade and persuade the central bank to lower rates, but offered few concrete steps.

The RBI said on Monday that recent reforms by the government mark a step in the right direction, but more was needed. Still, its language was less hawkish than in the recent past as it said inflation pressure was likely to moderate starting in the January-March quarter, a sign it may soon be ready to ease rates.

Higher spending on fuel, food and fertilizer subsidies along with sluggish tax revenues has led many economists to forecast a fiscal deficit this current fiscal year of about 6 per cent of gross domestic product (GDP). Mr Chidambaram said India's fiscal deficit would come in at 5.3 per cent, up from the government’s earlier target of 5.1 per cent.

"We do not have an option," Mr Chidambaram said, promising to reduce the deficit to 3 per cent of the GDP by March 2017. The deficit last year was 5.8 per cent.

RBI said the Survey of Professional Forecasters has lowered the GDP growth projection to 5.7 per cent from 6.5 per cent for the current fiscal. Average wholesale price based inflation forecast is revised upwards to 7.7 per cent from 7.3 per cent.

With inputs from agencies