Exclusive: India central
bank under rate cut pressure as growth slips back
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[November 25, 2014] By
NEW DELHI (Reuters) - India's economic
growth probably slowed to around 5 percent in the three months to
September, slipping from 5.7 percent in the previous quarter, two senior
finance ministry sources said, putting pressure on the central bank to
cut interest rates.
The sources said Finance Minister Arun Jaitley would argue
forcefully for Reserve Bank of India (RBI) Governor Raghuram Rajan
to lower interest rates when the two meet ahead of a decision on
rates next Tuesday.
Six months after Prime Minister Narendra Modi swept to power with a
promise that "better days are coming", growth of 5 percent would be
a serious slip back from the previous quarter and falls far short of
the 8 percent that Asia's third-largest economy needs to create
enough jobs for its growing workforce.
Official GDP figures are due for release on Friday.
Indian finance ministers often "jawbone" the RBI on interest rates,
but Jaitley's calls have become unusually insistent of late. Aides
say he will make the case for cuts forcefully when he meets Rajan.
"When Rajan meets the finance minister ahead of the policy review,
he would be urged to cut the interest rates," one senior finance
ministry official with direct knowledge of the matter told Reuters.
"A rate cut is the only hope for industry facing poor domestic and
external demand," the official said.
Rajan, who is due to speak later on Tuesday in Modi's home state of
Gujarat, has resisted calls to cut the RBI's 8 percent repo rate <INREPO=ECI>,
even though retail price inflation has dipped below the 6 percent
target he wants to hit by January 2016.
The hawkish former IMF chief economist has made it his mission to
introduce inflation targeting to India, a country long plagued by
double-digit price rises that hurt the more than 700 million people
who live on $2 a day or less.
So while factors such as weak international oil prices and flagging
export demand have prompted Asia's top two economies, China and
Japan, to take aggressive action to ease monetary policy, Rajan has
Policy makers in New Delhi say the RBI should follow suit,
ratcheting up the pressure on a central bank that enjoys policy
autonomy but lacks the kind of independence enjoyed by central banks
in the West.
"Rajan would have to really work hard to convince the Finance
Minister why he will not cut interest rates this time," said another
finance ministry official who is responsible for tax policy.
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After two years of sub-5 percent growth, India's $2 trillion economy
is struggling to break consistently above that level, which means
tax take for the year to end March is now set to miss budget by as
much as 900 billion rupees ($15 billion), the second official
Jaitley has so far vowed to uphold a fiscal deficit target of 4.1
percent of GDP, but his aides caution that any further cuts in
spending that the government has to make to hit it could further sap
"Expenditure cuts are certain, and that means a further slowdown in
the economy," the official said.
PUSHING ON STRING
Independent economists caution, however, that cuts in interest rates
may not be the best medicine for India, which is in desperate need
of structural reforms to make it easier to do business.
Red tape has depressed investment, and with it demand for credit. At
the same time a state-dominated banking system riddled with bad
loans may put an investment recovery at risk, the OECD said last
"A rate cut will have a sentiment boost impact for consumers but
then that sentiment boost won't last long as the supply side is
constrained," said Indranil Pan, chief economist at Kotak Mahindra
"The fall in inflation is not a structural correction but a cyclical
correction because oil, commodity prices are not in our hands and
they can turn anytime."
(Additional reporting by Suvashree Chaudhury; Writing by Douglas
Busvine; Editing by Alex Richardson and Will Waterman)
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