Two days ahead of the mid-quarter monetary policy review by the Reserve Bank of India, Finance Minister Pranab Mukherjee prodded the central bank to lower interest rates despite a rise in inflation in May.
In an address to bankers and corporate India, Mukherjee said he hoped for some rate adjustment by the central bank in the wake of a slowdown in growth.
With the GDP growth having slowed to a nine-year low of 5.3 per cent in the fourth quarter of the last financial year, there is a growing expectation among market participants of an interest rate cut by the RBI on Monday.
The rise in inflation in May was primarily due to a rise in food prices, for which monetary policy tools had a limited role, Mukherjee said.
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“The wholesale price inflation rose to 7.55 per cent in May from 7.23 per cent in April, whereas food inflation is also hovering around the 10 per cent levels, which is a matter of concern. We need to tackle food inflation by removing supply-side constraints. It need not be tackled by monetary measures as the ability of monetary policy to tackle food inflation is limited,” he said.
In April, the RBI had reduced policy rates 50 basis points, for the first time in three years. The central bank recently hinted it had more room to reduce rates in the wake of falling crude oil prices and stable core inflation.
While asking the RBI to address growth issues, Mukherjee said the government would do its bit to address the central bank’s concerns on subsidies and the fiscal deficit.
“Keeping in view all the current factors, I am confident they (the RBI) will adjust monetary policy as we are adjusting the fiscal policy. We are cutting subsidies as they must be within two per cent of the GDP,” he said. Mukherjee, who has been nominated as the candidate of the ruling Congress-led United Progressive Alliance for the presidential elections due next month, listed slow growth, high fiscal and current account deficits, inflation and a negative sentiment as challenges faced by the economy.
He said the finance ministry had written to state governments to “temporarily” reduce the tax burden on petroleum products till crude oil prices dropped to $90 a barrel in the international market. “We have analysed that more than 50 per cent of the costs retailers pay are owing to state and central government taxes. Hence, we have written to all the chief ministers to reduce the tax burden temporarily till crude prices come down to $90 per barrel. This will help the Union government reduce subsidy and bring relief to customers,” he said.
Talking about the euro zone crisis, Mukherjee said the situation in Greece was a concern. “There has been uncertainty over the rupee due to the euro zone crisis, which is a matter of concern. What is is going to happen in the Greek election scheduled on June 17? Will Greece remain in the euro zone? We are concerned about all these issues.”
