FM tells RBI to cut rates, again, almost

This time, it’s more straightforward.

Finance minister Palaniappan Chidambaram said interest rates “must come down”.

If that sounds like an order, it is.

The usage of ‘must’ as a verb is unlikely to be lost on Duvvuri Subbarao.

“If the fiscal policy steps that we are taking encourage the Reserve Bank of India (RBI) to take monetary policy action which will result in lower interest rates, I think that will be good,” the 67-year-old finance minister said in an interview with Bloomberg Television in Tokyo on Friday.

That’s the second overt notice Chidambaram has sent Mint Road inside a month.

And he said the rupee must appreciate a little more.

“It has appreciated about 5% or 6% in the last few weeks, but I think the rupee must find a reasonable level, its true level,” he said.

RBI governor Duvvuri Subbarao left interest rates unchanged at 8% for the third straight time during its monetary policy review on September 17, but had snipped the cash reserve ratio (CRR) by 25 basis points.

That had elicited a not-so-direct fiat from Chidambaram.

“The response of the RBI on October 30 will be far supportive of growth,” he said on that day. It’s ‘a small step’ that’s ‘welcome’.

“Like others, I am not disappointed (with RBI action). There is a regular review that is due on October 30, which is only six weeks away,” the finance minister had then assuaged the Street.

The RBI has said that curbing fiscal deficit may boost scope to cut interest rate this year.

The government announced the first increase in diesel prices in more than a year on September 13, after Chidambaram pledged to contain a fiscal shortfall that has put the nation’s investment-grade credit rating in jeopardy.

It also opened the industries including retail and aviation to more foreign investment the next day, and this month decided to seek parliamentary approval for more overseas participation in the insurance and pension businesses.

The rupee has surged more than 5% against the dollar in the past three months, the most among major Asian currencies, buoyed by the biggest opening of the economy to overseas companies under Singh as prime minister since 2004.

With inputs from Bloomberg