Rajan action cheered at FinMin

The finance ministry on Wednesday said it expected the Reserve Bank of India (RBI) to cut the policy rate further. The ministry said RBI Governor Raghuram Rajan’s decision to cut the policy rate by 25 basis points would boost demand and hence economic growth, pegged at 8.1-8.5 per cent for 2015-16.

“What is going to happen to the rate cycle is going to be driven by data and RBI has signalled this clearly… There is, however, further room for easing,” said Jayant Sinha, minister of state for finance. “We have said in Parliament that we are pursuing a very prudent fiscal consolidation road map. Our aim is to move growth onto a sustainable, non-inflationary path… We are in a situation where we see EMIs (equated monthly instalments for loan repayments) coming down.”

ALSO READ: Further rate cuts of up to 1% expected in 2015: Experts

Rajan surprised the markets by reducing the benchmark interest rate by 0.25 per cent to 7.5 per cent, on the back of softening inflation and Finance Minister Arun Jaitley’s commitment in the Budget to continue the fiscal consolidation programme, albeit with a year’s delay in the schedule. This is the second time in less than two months that RBI has resorted to an out-of-regular policy meeting cut.

“If you take all that has happened in the past few days, the railway budget, the Union Budget, the Economic Survey, the RBI action, all these suggest the economy is on way to maintaining a healthy momentum,” Chief Economic Advisor Arvind Subramanian said at a press briefing after the rate cut. “The outlook looks good because it is backed by data, reforms and a Budget that is hopefully going to push forward growth. The rating agencies should take their lessons from that.”

After the presentation of Budget 2015-16 on Saturday, global and domestic agencies had ruled out any immediate upgrade in India’s sovereign ratings and had red-flagged the country’s delayed fiscal consolidation road map. Also warning against any slippage from the “ambitious” disinvestment plan proposed.

ALSO READ: Why many think RBI’s surprise rate cut is not positive

Subramanian said the rate cut was consistent with the government’s views in last week’s Economic Survey and thereafter in the Budget for the outlook on inflation and the overall economy. “It (rate cut) shows RBI and the government are on the same page in terms of how we view the economy. It also means the Budget can be seen as conducive to non-inflationary growth,” he added.

ALSO READ: Modi govt’s policies helped in reducing repo rate: BJP

Revenue Secretary Shaktikanta Das said the cut augured well for business and would prompt people to go for housing and consumer loans, boosting demand and growth. “The government has done its bit by presenting a progressive and growth-oriented Budget. RBI has responded by reducing the rates. Now, it’s for business, industry and people of the country to make the best advantage of it.”