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Indian govt to gain most from rate cuts-economist

BOMBAY: The Indian government is likely to gain the most from the interest rate cuts the Reserve Bank of India (RBI) announced on Saturday, Deutsche Bank's regional economist Sanjeev Sanyal said.

"Growth (economic) will benefit from the rate cut, but the biggest beneficiary of this is going to be the government," Sanyal told Reuters Television on Monday.

"Government borrowing programme is going to be quite large and, it's not appreciated, but the rate cuts are almost as good as for the fiscal deficit as the subsidy cuts."

The Reserve Bank of India (RBI) on Saturday cut the cash reserve ratio to eight percent from nine in two stages of 0.5 percentage points each, effective from April 8 and April 22.

It also announced a reduction in the bank rate, at which the central bank lends to commercial banks and primary dealers, to 7.0 percent from the current 8.0 percent.

The central bank cut the repo rate to five percent from six with effect from on Monday. The rate on savings deposits with banks was lowered to four percent from 4.5 with effect from April 1.

The government has a high borrowing programme, estimated at a gross 1.17 trillion rupees ($26.83 billion), in 2000/01 (April-March).

Interest payments during the year are estimated at 1.012 billion rupees, almost half the government's total revenues.

Sanyal said the RBI will now probably shift its focus to inflation and there may not be more rate cuts in the current economic cycle. "From the monetary policy perspective this is probably the last rate cut in this cycle. We might see some adjustment in the small savings and pension rates which might be brought down a little bit more," he said.

"From here on the RBI will be very concerned about inflation, and should the inflation go back, they might actually go the other way atleast in the medium term," he added.

Wholesale price inflation averaged around 2.75 percent in 1999/2000.

Sanyal said the rate cuts will boost GDP growth, which could cross seven percent this year compared with the estimated 5.9 percent in 1999/2000.

"We saw industrial growth and services pick up last year. Industrial growth in the last financial year was around 7.2 percent compared to 3.5 percent in the year earlier... GDP growth got a hit because of farm sector," Sanyal said.

"If farm income grows by around 3 percent, the GDP will grow to around the 7.5 percent in this financial year."

Sanyal said he expected strong foreign inflows during the year, but the current account deficit could widen with growth in non-oil imports and the higher international oil prices.

"...looking forward non-oil imports should grow and that combined with high oil prices should definitely put some pressure on the current account, but it will surely be below 2.0 percent of GDP, somewhere around 1.5 percent which is manageable especially given the context of foreign inflows."

"The rupee will not come under too much pressure from here on, atleast not in the medium term," Sanyal said. -Reuters