The Reserve Bank of India (RBI) faces growing pressure to cut interest rates later on Tuesday for the first time since April after the finance minister pledged to rein in the country's fiscal deficit.
Remarks by Finance Minister P. Chidambaram at a hastily called news conference on Monday that he would nearly halve the deficit in just over four years had increased the chances for a Tuesday rate cut, some analysts said.
"Net-net, the odds for a rate cut have increased because of today's press conference," said A. Prasanna, an economist at ICICI Securities Primary Dealership in Mumbai.
A Reuters poll on October 19 found most economists expected the Reserve Bank of India to keep its policy repo rate unchanged at 8 percent. Nearly half said the RBI would take a more targeted measure and cut the cash reserve ratio, the share of deposits banks must hold with the central bank, from 4.5 percent in an effort to get banks to pass along earlier rate cuts to borrowers.
The RBI has kept the policy repo rate at 8.00 percent since April despite calls from members of the government and industry for action to revive the country's flagging economic growth.
It says inflation -- at a 10-month peak in September -- is too high and that government action is needed instead to address its fiscal deficit and supply-side bottlenecks in the economy that fuel price pressures.
New Delhi has unveiled a spate of reforms to bolster investment and rein in its fiscal deficit, including raising the price of subsidised diesel and lifting caps on foreign investment in several industries.
While those measures have improved the mood of markets, the central bank has sought more in order to improve the investment climate and lower the fiscal deficit.
On Monday, Chidambaram pledged to nearly halve the fiscal deficit by March 2017 in a bid to avoid a credit rating downgrade and persuade the central bank to cut interest rates. But he offered few concrete steps on how to achieve the goal.
Higher spending on fuel, food and fertiliser subsidies along with sluggish tax revenues have led many economists to predict a fiscal deficit of 6 percent of GDP for the fiscal year that ends in March.
Chidambaram said India's fiscal deficit would hit 5.3 percent of GDP this fiscal year, up from New Delhi's earlier target of 5.1 percent.
In a pre-policy review on Monday, the central bank said that New Delhi's reforms were a step in the right direction but more was needed, and fast implementation was key.
It also said headline inflation, which hit 7.8 percent for September and is expected by many economists to rise to more than 8 percent in coming months, was likely to ease starting in the January-March quarter.
"As macro-risks from inflation and twin deficits recede further, that could yield space down the line for monetary policy to respond more effectively to growth concerns," the RBI wrote, a sign that it may be moving towards a rate cut. The twin deficits refer to the fiscal and current account deficits.