Govt fiscal map ups likelihood of rate-cut: Experts

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

Q: The finance minister reiterated the government's intent or seriousness to cut down the fiscal deficit to about 5.3 percent, a day ahead of the Reserve Bank's credit policy. In the context of what has been stated by the Reserve Bank in its macroeconomic report, do you still believe Tuesday's credit policy will be a status quo one or is there at least a window for a CRR cut?

Rao: I would think that given the timing of the announcement of a map for fiscal consolidation, there is a likelihood of the RBI reciprocating with 25-basis point cut in CRR. Though the government’s intent towards fiscal consolidation over the next two- to-three years was very clearly spelt out, the RBI, in its report, has raised the question of implementation while acknowledging that the government's intent is in the right spirit.

The RBI has added that the implementation of measures to ensure fiscal consolidation was frequently emphasised as an enabling facilitator for further cut in rates. So though there is a chance of a CRR cut, we do believe that there are other ways of easing liquidity such as raising funds through open market operations also.

Q: Do you believe that the RBI may decide to throw a surprise with a move on the repo rate?

Ranade: We are on the eve of the mid-year credit policy which is of greater significance as it’s not just about rates but also about other regulations and other issues of policy. The  RBI's macroeconomic report that was released today states that inflation is above the set target and it was expected to be at 7.3 percent and now the central bank estimates inflation to be at 7.7 percent.

The central bank also adds that it expects inflation to soften in the next six months and if that is the case, the central bank has explained that it would be concerned about lower growth. The RBI’s earlier target for growth was 6.5 percent but that ahs been revised to 5.7 percent and even that forecast is thought to be an optimistic view.

So inflation expected to soften in the next six months and unexpectedly slower-than-expected economic growth makes a good case for some central bank initiative on the rates.

Q: How do you view the Reserve Bank's statement advising cautious calibration to contain macroeconomic risks?

Ranade: The key macroeconomic risk is the widening current account deficit which could be contained by triggering a potentially virtuous cycle. The RBI initiates a rate cut which triggers positive sentiment which brings in inflows which then creates a positive pressure on the rupee that contributes to softening inflation, rates and finally ease pressure on the current account deficit.