Opinion: Sitharaman's growth push finds a dependable ally in RBI

Finance Minister Nirmala Sitharaman said that the Reserve Bank of India would keep growth in mind while taking a call on interest rates

Finance Minister Nirmala Sitharaman said that the Reserve Bank of India would keep growth in mind while taking a call on interest rates. She was responding to Network18's Editor-in-Chief, Rahul Joshi, on whether RBI should start cutting interest rates to spur growth. "I think RBI takes a call keeping growth in mind. They have been steady," said the finance minister.

Currently, the repo rate, the rate at which RBI lends to banks, is at 6.5%, and it is widely believed that the central bank has hit the peak of the rate-hiking cycle. The first cut in interest rates is expected later this year, provided inflation stays within the 2-6% band mandated by law. India's retail inflation currently stands at 5.7%, near the higher end of the band, and governor Saktikanta Das has indicated in some remarks that he isn't about to cut rates anytime soon. The RBI's rate-setting body, the monetary policy committee, last met on December 8, and it's very likely this month's meeting will maintain a status quo.

Sections of the real estate industry have grumbled about elevated interest on home loans, and there have been some suggestions that higher Interest rates are one reason why the much-awaited private sector capex boom is not taking off. But the Bharatiya Janata Party's strong political position in the run-up to the April-May elections is likely to ensure that the Indian central bank can operate within a technocratic framework. That's a freedom of action that Jerome Powell, whose rate-cutting actions are likely to be pivotal in the upcoming seemingly inevitable Biden-Trump matchup, may well envy.

RBI's actions are also likely to be correlated with the actions of fellow central banks. If the US Federal Reserve and the European Central Bank start cutting rates from mid-2024, RBI is likely to follow suit.

On Thursday, bonds cheered the government's restrained borrowing plan that eschewed populism and stuck to the fiscal glide path. While rating agencies assign India an investment grade, albeit at the lowest rung within that category, an issue that has long irked policymakers at North Block. On Friday, Sitharaman said she hoped the rating agencies would take a more holistic view.

PSUs have played a stellar role in the recent and ongoing market rally, something which the FM alluded to while responding to a question on privatisation. The Nifty index closed 156 points higher on Friday.

To some extent, that's an unusual dilemma for the government. Why privatise a company whose value might keep going up?

Apart from the Air India divestment, little has happened, and it's not at all clear that strategic sales would be on the top of the agenda during a third Modi term. The response to such strategic sales that have been attempted has been underwhelming. The government might do well to explore options such as reducing the state's take below 51% so that PSUs lose the public sector tag while the government essentially retains ownership. If it's feeling ambitious, a third Modi government might well want to explore a Temasek-type model in which a professionally run holding company manages the state's stake.

For all the discussion on capital expenditure and fiscal deficit, the upcoming political slugfest was clearly on Sitharaman's mind. Responding to a question about actions by agencies such as the Enforcement Directorate (ED) against opposition leaders, she reiterated that the agencies worked in a professional manner. "Room full of cash" had been found during search and seizure operations, she said, asserting that public tolerance of corrupt leaders had gone down.

The FM reiterated her decision to bring out a white paper on the erstwhile United Progressive Alliance government's management — or the lack thereof — of the economy in 2004-14, describing some of the previous government's actions as "immoral".

The BJP-led government's pitch for a third five-year term is, to a considerable extent, based on India's growing economic stature. The world's fifth-largest economy is likely to reach the third position before the end of the decade, behind the US and China.

She also lashed out at Tamil Nadu's Dravida Munnetra Kazhagam government over what she termed as its anti-Hindu position and denounced the Congress for its alliance with the DMK. Her views are based on her "lived experience", Sitharaman said.