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India's fiscal deficit key to rate cut - banker

BOMBAY: The Reserve Bank of India (RBI) may cut interest rates if the government signals a lower fiscal deficit in its federal budget for 2000/2001 (April-March), Vasan Shridharan, treasury economist at Standard Chartered Bank said on Tuesday.

"...the fiscal deficit is a critical variable in reducing interest rates. If the government today signals a lower fiscal deficit, then the Reserve Bank of India has that much more degree of freedom to go ahead and cut the interest rates," Shridharan told Reuters Television.

Finance Minister Yashwant Sinha, who is due to present the federal budget for the fiscal year staring in April at 2:00 p.m. (0830 GMT), is expected to lay the groundwork for the central bank to lower interest rates by indicating a lower fiscal deficit target for the year.

A cut in interest rates would also help the government bring down the deficit, Sridharan said.

On Monday, the Finance Ministry's economic survey for 1999/2000, its annual report card on the economy before the budget, stressed the need for the government to take hard decisions to tackle the fiscal deficit.

The survey pegged the fiscal deficit for 1999/2000 at 4.1 percent of GDP compared with 5.0 percent the previous year, but said the combined deficit of central and state governments had climbed to 8.5 percent of GDP in 1998/99 and was expected to rise further in 1999/2000.

Shridharan said stable currency market conditions and an inflation rate hovering near its all-time lows afforded room to the central bank to ease monetary policy in the coming months.

"The rupee is stable, inflation is low, so we could expect a cut in the interest rate and a further easing in the monetary policy over the course of the next two months," he said.

BUDGET TO TACKLE DEFICIT

Shridharan said he expected the Bharatiya Janata Party-led coalition government to focus on reducing the fiscal deficit by cutting subsidies and boosting tax revenues.

"...the Indian economy is in fine fettle, manufacturing is expanding, exports are robust, productivity is rising, foreign capital flows are strong, stock markets are booming....But there one major imbalance: the weak fiscal position," he said.

"Quite clearly, fiscal tightening will be the focus of the five-month-old BJP coalition government today."

Shridharan said the government has enough room to increase tax revenues by including India's booming services sector in the tax net.-Reuters