Inflation moderating, expect rates to come down: Mayaram

The Finance Ministry expects interest rates to come down with softening of inflation. “We see inflation coming down further and we hope that the RBI Governor, as he indicated in his recent policy review, will not hold interest rates high longer than necessary,” said Finance Secretary Arvind Mayaram.

He was optimistic that the economy would grow at 5.8 per cent this fiscal.

The RBI kept the repo rate (the rate at which banks borrow from the RBI) unchanged at 8 per cent, for the third time in a row in its August 5 monetary policy review. The argument then was that there are risks of higher inflation in view of uncertainty over the monsoon and its fallout on food production, as well as risks from volatile international oil prices.

The RBI is expected to mainly use retail inflation (Consumer Price Index or CPI) to revise interest rates. The central bank’s target for retail inflation is 8 per cent by January 2015.

According to Government data, retail inflation for the month of July was 7.9 per cent, slightly higher than the 7.46 per cent in June. At the same time, wholesale inflation moderated to 5.19 per cent in July from 5.43 per cent in June.

The Finance Secretary felt that GDP growth in the current fiscal year is likely to be 5.8 per cent or even 5.9 per cent as against 4.7 per cent in 2013-14.

The new estimate is higher than the RBI’s projection of 5.5 per cent and also slightly different from the Economic Survey. The survey estimated growth to be in the 5.4-5.9 per cent range, with a bias towards the lower end.

“I have great optimism and hope that with the measures announced by the new Government, we will be able to set an example in a world recovering from very sluggish growth. We can also contribute significantly to global growth,” he said.

Talking about the softening of international oil prices, Mayaram said this, along with direct benefit transfers, would help lower the overall subsidy bill. “I think we will be able to exit the diesel subsidy soon and diesel is going to become market-linked,” said Mayaram.

Currently, the under-recovery (the difference between selling and cost price) on diesel is ₹1.78/litre and it is likely to come down as the price of the Indian crude basket fell to around $100 a barrel on August 20, from $111.94 on June 19.