By Shamik Paul
MUMBAI, Oct 30 (Reuters) - India's central bank faces
growing pressure to cut interest rates later on Tuesday for the
first time since April after the finance minister pledged to
rein in the country's fiscal deficit.
Remarks by Finance Minister P. Chidambaram at a hastily
called news conference on Monday that he would nearly halve the
deficit in just over four years had increased the chances for a
Tuesday rate cut, some analysts said.
"Net-net, the odds for a rate cut have increased because of
today's press conference," said A. Prasanna, an economist at
ICICI Securities Primary Dealership in Mumbai.
A Reuters poll on Oct. 19 found most economists expected the
Reserve Bank of India to keep its policy repo rate unchanged at
8 percent. Nearly half said the RBI would take a more targeted
measure and cut the cash reserve ratio, the share of
deposits banks must hold with the central bank, from 4.5 percent
in an effort to get banks to pass along earlier rate cuts to
The central bank has kept the policy repo rate
at 8.00 percent since April despite calls from members of the
government and industry for action to revive the country's
flagging economic growth.
It says inflation -- at a 10-month peak in September -- is
too high and that government action is needed instead to address
its fiscal deficit and supply-side bottlenecks in the economy
that fuel price pressures.
New Delhi has unveiled a spate of reforms to bolster
investment and rein in its fiscal deficit, including raising the
price of subsidised diesel and lifting caps on foreign
investment in several industries.
While those measures have improved the mood of markets, the
central bank has sought more in order to improve the investment
climate and lower the fiscal deficit.
On Monday, 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 cut interest rates.
But he offered few concrete steps on how to achieve the goal.
Higher spending on fuel, food and fertiliser subsidies along
with sluggish tax revenues have led many economists to predict a
fiscal deficit of 6 percent of GDP for the fiscal year that ends
Chidambaram said India's fiscal deficit would hit 5.3
percent of GDP this fiscal year, up from New Delhi's earlier
target of 5.1 percent.
In a pre-policy review on Monday, the central bank said that
New Delhi's reforms were a step in the right direction but more
was needed, and fast implementation was key.
It also said headline inflation, which hit 7.8 percent for
September and is expected by many economists to rise to more
than 8 percent in coming months, was likely to ease starting in
the January-March quarter.
"As macro-risks from inflation and twin deficits recede
further, that could yield space down the line for monetary
policy to respond more effectively to growth concerns," the RBI
wrote, a sign that it may be moving towards a rate cut. The twin
deficits refer to the fiscal and current account deficits.
(Editing by Neil Fullick)