Cut deficit not with rates, but with policy too: Experts

Below is an edited transcript of the discussion on CNBC-TV18.

Q: What is your view of the government’s  statements?

Chaudhari: Two legitimate points of view emerge from the RBI's announcement of its monetary policy. One view states that the economy has been slowing in the last two quarters, demand is indeed weak and even if inflation is elevated because demand is weak, there is not much inflationary momentum and there is room for easing monetary policy through a rate cut.

The alternative view says that the headline inflation ,even as of today ,is quite strong and that the near-term momentum of the last three months is also strong and at this point in time, to actually cut rate maybe unwise. But monetary policy could be relaxed a bit and that’s why the CRR cut was announced. After all, the cut in CRR also ensures an easing of monetary policy.

Q: Do you agree with the government that the time was right for a rate cut?

Chaudhari: I think both views are valid.

Q: Do you believe it is unreasonable for the finance ministry to have expected the RBI to move on rates given the fact that inflation is expected to go above 8 percent?

Chinoy: It is a tricky balancing act. The finance ministry has to its credit moved quite dramatically over the last month or so. It has demonstrated intent to continue the reform momentum and it believes very firmly that sentiment is a big part of the investment slowdown and that the central bank must do its part to boost sentiment. But inflation right now is just uncomfortably high.

Retail inflation is at 10 percent, core inflation is at 8 percent and current account deficit is at 4 percent of GDP. So, it is entirely reasonable  for the RBI to be cautious in easing monetary policy. This calls for fine balancing and I agree that both sides have legitimate arguments at this point in time.

Q: What do you make of the RBI's warning that there will be no rate-cuts until January?

Chaudhari: The month of January falls within the purview of the RBI's fourth- quarterly review. But there is a potential for change in the interim. I would say that the RBI is certainly assigning greater weightage to year-to-date headline inflation and if inflation turns out to be more favourable in the intervening months, it maybe encouraged to take a mid-quarter view.

Q: By How much do you actually expect the RBI to cut rates at end of January?

Chinoy: I guess a lot of financial-market participants expected a cut today because tactically it was a good opportunity. Here is a predicament the RBI faces in the next quarter. Inflation is going to rise above 8 percent over the next few months. So, when the RBI meets in the last week of January it will have the inflation data for December which will likely be somewhere between 8-8.5 percent.

Given the repeated emphasis that monetary policy has to focus primarily on inflation and inflation-expectations today, it then becomes harder for the RBI to justify a rate-cut in January when inflation is even higher than it is, at these levels. So, my sense is you might actually have to wait for any rate action to happen in March when there is a greater belief that inflation is on its way down and that many of the government announcements have begun to affect the situation on the ground.

Q: How do you read the move as far as fiscal consolidation is concerned?

Chaudhari: There are some specific measures which have been implemented and what remains unclear is the measures that the government will implement in the future. However the finance minister has reiterated that the Kelkar Committee Report and guidelines will be implemented. This indicates that the government will have to continue with its announcement of reforms not just in this year, but the next year as well.

Though important steps have been taken towards fiscal consolidation but some more needs to be done and for the last one-and-a-half years, the RBI has been consistently stating that the situation calls for more initiatives than just monetary policy.

Q: Do you believe that the fiscal deficit is at 5.3 percent?

Chinoy: The finance minister has four months before the end of the financial year to draw a line and peg the deficit at 5.3 percent. I admit that the deficit will be very close to 5.3 percnet. But my worry is that if the deficit is achieved at 5.3 percent by pushing planned capital expenditures to next year, by running arrears in certain areas of subsidies, through asset sales and not so much through tax revenues, it might result in fiscal consolidation or withdrawal of fiscal stimulus to bring inflation pressures down.

But let's give credit where it is deserved. The government has said that it will achieve the fiscal deficit and if it sticks to consolidation next year which is an election year, the deficit may go awry. So, if the government can get to 5.3 percent this year and achieve 4.8 percent next year, that will bring a lot of relief to the central bank.