RBI under rate cut pressure as growth slips

India's economic growth probably slowed to around 5 per cent in the three months to September, slipping from 5.7 per cent in the previous quarter, two senior finance ministry sources said, putting pressure on the Reserve Bank to cut interest rates.

The sources said Finance Minister Arun Jaitley would argue forcefully for Reserve Bank of India (RBI) Governor Raghuram Rajan to lower interest rates when the two meet ahead of a decision on rates next Tuesday.

Six months after Prime Minister Narendra Modi swept to power with a promise that "better days are coming", growth of 5 per cent would be a serious slip back from the previous quarter and falls far short of the 8 per cent that Asia's third-largest economy needs to create enough jobs for its growing workforce.

Official GDP figures are due for release on Friday. Indian finance ministers often "jawbone" the RBI on interest rates, but Jaitley's calls have become unusually insistent of late. Aides say he will make the case for cuts forcefully when he meets Rajan.

"When Rajan meets the finance minister ahead of the policy review, he would be urged to cut the interest rates," one senior finance ministry official with direct knowledge of the matter told Reuters.

"A rate cut is the only hope for industry facing poor domestic and external demand," the official said.

Rajan, who is due to speak later on Tuesday in Gujarat, has resisted calls to cut the RBI's 8 per cent repo rate, even though retail price inflation has dipped below the 6 per cent target he wants to hit by January 2016.

The hawkish former IMF chief economist has made it his mission to introduce inflation targeting to India, a country long plagued by double-digit price rises that hurt the more than 700 million people who live on $2 a day or less.

So while factors such as weak international oil prices and flagging export demand have prompted Asia's top two economies, China and Japan, to take aggressive action to ease monetary policy, Rajan has held out.

Inflation target

Policy makers in New Delhi say the RBI should follow suit, ratcheting up the pressure on a central bank that enjoys policy autonomy but lacks the kind of independence enjoyed by central banks in the West.

"Rajan would have to really work hard to convince the Finance Minister why he will not cut interest rates this time," said another finance ministry official who is responsible for tax policy.

After two years of sub-5 per cent growth, India's $2 trillion economy is struggling to break consistently above that level, which means tax take for the year to end March is now set to miss budget by as much as Rs 900 billion ($15 billion), the second official estimated.

Jaitley has so far vowed to uphold a fiscal deficit target of 4.1 per cent of GDP, but his aides caution that any further cuts in spending that the government has to make to hit it could further sap growth.

 "Expenditure cuts are certain, and that means a further slowdown in the economy," the official said.

Pushing on string

Independent economists caution, however, that cuts in interest rates may not be the best medicine for India, which is in desperate need of structural reforms to make it easier to do business.

Red tape has depressed investment, and with it demand for credit.

At the same time a state-dominated banking system riddled with bad loans may put an investment recovery at risk, the OECD said last week.

"A rate cut will have a sentiment boost impact for consumers but then that sentiment boost won't last long as the supply side is constrained," said Indranil Pan, chief economist at Kotak Mahindra Bank.

"The fall in inflation is not a structural correction but a cyclical correction because oil, commodity prices are not in our hands and they can turn anytime."