Decision to keep rates unchanged was expected: Chidambaram

Former Finance Minister P Chidambaram said on Tuesday the Reserve Bank of India's decision to keep interest rates unchanged was expected and the government should build on what has been achieved.

"RBI's credit policy is entirely along expected lines. It is natural for the Governor to await the Budget and the stance of the government on fiscal consolidation," he said in a statement.

The Reserve Bank of India, in its Second Bi-Monthly Monetary Policy Statement for 2014-15, kept the key interest rate unchanged at 8 per cent.

It also cut the amount of deposits banks need to park in government securities, known as the statutory liquidity ratio, by 0.5 per cent to 22.5 per cent to improve availability of funds in the system.

Chidambaram, however, wondered whether the new BJP-led National Democratic Alliance government would move on the path of fiscal consolidation or allow the fiscal deficit to rise.

"Will the government follow the Kelkar recommended path and affirm the Budget estimate fiscal deficit of 4.1 per cent for 2014-15?

"Or will the government take the advice of Arvind Panagariya (wrong advice in my view) and allow the fiscal deficit to rise? This is the million dollar question," he said.

However, he said the government could take comfort from core sector growth figures for April and passenger vehicle sales in May.

The output of eight core industries increased 4.2 per cent in April, while domestic car sales saw an upswing last month with major firms Maruti Suzuki, Hyundai, Honda and Ford reporting good growth.

"There is an opportunity for the government to build upon what has been achieved," Chidambaram added.

Commenting on the RBI policy, KPMG (India) Partner and Head of Banking Practice Harshvardhan Bisht said the central bank has adopted adopted a 'wait and watch' policy by keeping rates unchanged.

"We anticipate that in the future, a strong fiscal consolidation plan along with constructive measures in the supply side by the new government will decide the direction of the interest rates," Bisht said.

Image: Former Finance Minister P Chidambaram