Central bank cautious on rate cut, says Lahiri

The finance ministry said the Reserve Bank of India's credit policy announcement indicated its cautious approach. "The United States has recorded an unprecedented third quarter growth of 7.1 per cent. What is going to happen to global interest rates is not very clear," said Ashok K Lahiri, chief economic advisor (CEA) to the finance minister.

"The RBI wants to be cautious," Lahiri said. A rate cut was not the only answer to pump prime the economy, he said, adding that it had a lot to do with the credit delivery mechanism. Banking and Insurance Secretary NS Sisodia added that despite low interest rates in Japan and the US, the growth rates there were not very high. "There is no causal relationship between growth rates in the economy and interest rates," he said.

Lahiri said the RBI did not think this was the right time for a bank rate cut. The apex bank had rightly said that monetary policy corrections would be made promptly and when required, adding that such corrections need not wait for a particular date, he said.

The CEA noted that the government was guided by the Fiscal Responsibility and the Budget Management Act in addressing the central bank's concerns about speeding up the fiscal consolidation process. "We take the RBI's concern in the right spirit. But there is nothing that leads us to believe that the fiscal deficit target (of 5.6 per cent of GDP) will be exceeded," he said.

The fiscal deficit during the first half of this financial year was relatively higher due to the "under-performance" of excise collection and budgeting of petroleum subsidy worth Rs 4,000 crore. "The ministry is taking all possible measures to make sure that things are on track to improve excise collection," Lahiri said.

When pointed out that fiscal deficit in the first half had touched over 52 per cent of the budgeted amount, Lahiri replied: "If you take the five-year moving average, the fiscal deficit as a percentage of Budget estimates has been 51.9 per cent. It is, however, true that it was comparatively higher than last fiscal's figure of 42.7 per cent."

Lahiri said the ministry was happy to note that there was unanimity between the government and the RBI on the buoyant growth expectations in this financial year. The RBI revised its growth expectations to 6.5-7 per cent for 2003-04.

Lahiri had last month said the economy might grow over 7 per cent on the backdrop of an evenly distributed monsoon and a rebound in agricultural growth.