Finance Ministry not too hopeful of RBI lowering rates in wake of rising inflaion.

NEW DELHI: The finance ministry, which has been prodding the Reserve Bank to cut interest rates for months, has tempered its expectations in the wake of a recent rise in inflation.

Two finance ministry officials told ET that they believe the central bank was unlikely to cut key policy rates at its half-yearly monetary policy review on October 30.

"A change in policy rates looks unlikely before January," one of the officials said, adding that since inflation continues to be above the central bank's comfort zone, it may not want to touch rates this time round. They added that the final decision was entirely that of RBI.

A status quo, however, will disappoint the stock markets, which have been looking for a trigger to climb after rising nearly 20 per cent this calendar year, and industry, which sees lowering of interest rates as necessary for boosting investments. The investment rate dropped to 34.7 per cent of GDP in 2011-12 from 38.1 per cent in the pre-crisis period of 2007-08.

According to the median estimate of 28 analysts in a Bloomberg survey, the central bank is likely to leave its benchmark interest rate unchanged at 8 per cent.

According to government data, wholesale price inflation rose to 7.8 per cent in September from 7.55 per cent in August, even before the full pass-through of higher diesel prices. Core inflation, a key measure of demand closely watched by RBI, remained high at 5.6 per cent.

The marginal pick-up in industrial growth in August to 2.1 per cent, from a contraction of 0.2 per cent in the month before, will also give the central bank some room to watch the economy a bit more.

Another official, however, said RBI might announce a token cut to signal that it appreciates the government's move to rein in subsidies, improve fiscal health and overall sentiment.

"The governor could spring a surprise, as the finance ministry has worked out a fiscal consolidation plan high on credibility," the official said.

RBI Governor D Subbarao met Chidambaram on Friday for customary pre-policy discussions, and though both did not give details of the meeting, officials did not seem too upbeat about the possibility of a rate cut.

"RBI will go by its own assessment of the situation...A rate cut looks difficult," another finance ministry official said.

Independent analysts, too, are not convinced that there is a case for a rate cut, though many of them had factored in some monetary easing because of the pressure from the government.

"Two reasons why RBI may not tinker with rates is, firstly, absence of a fiscal consolidation road map, and secondly, core inflation remaining high," said HDFC BankBSE 0.45 % chief economist Abheek Barua.

In its policy review last month, the central bank had cut cash reserve ratio by 25 basis points to 4.50 per cent, but kept the repo rate unchanged. It had last cut policy rates by 50 basis points in April.

Source : economictimes.indiatimes.com