Sinha sees lower rates, hints at reserve cuts
Finance Minister Yashwant Sinha, battling an industrial slowdown, said on Monday he expected domestic interest rates to ease despite concerns about a possible upswing in US rates.
"US rates are at the rock bottom. They can't go below this," he told reporters on the sidelines of a banking seminar. "But that is not the case in India.
"I expect interest rates to be soft in this financial year," Sinha said.
The Reserve Bank of India has cut its benchmark bank rate by 150 basis points since February 2001 to a three-decade-low of 6.5 per cent, but analysts believe there is scope for more cuts to revive sluggish industrial activity.
Data released last week showed India's manufacturing sector remained a laggard with growth slowing to 2.8 per cent in the third quarter of 2001-02 (April-March) compared with last year's 7.1 per cent.
Bond traders are expecting the annual monetary policy meeting on April 29 to lower interest rates.
Sinha's comments soothed traders' concerns that a reversal in the US rate stance could reduce the Indian's central bank's leeway to lower domestic interest rates.
The US Federal Reserve last month left interest rates unchanged and set the stage for future increases by dropping its long-held recession warning.
Sinha also said there was scope for easing statutory reserve requirements for banks, under a long-term structural reform process, so that they could use the cash for commercial purposes.
"There is scope for reduction in the bank's Cash Rreserve Ratio and Statutory Liquidity Ratio in the long term," Sinha said in reply to a question about whether he expected the bank's CRR to be lowered.
Indian banks are currently required to maintain a CRR of 5.5 per cent and SLR of 25 per cent -- which means nearly a third of bank deposits need to be held in government securities or as cash balances with the central bank.
FARM SAVES THE DAY
"We can look forward for better days ahead," Sinha told the bankers. "I have no doubt the upswing in the agricultural sector will have an impact on the overall economy."
India's economy expanded by a cracking 6.3 per cent in the third quarter, helped by a buoyant farm sector and prompting analysts to say the country was pulling out of its economic downturn.
The farm sector grew by a robust 7.1 per cent after shrinking 0.8 per cent last year.
Agriculture contributes a hefty 25 per cent of India's gross domestic product and is crucial to demand as two-thirds of India's billion-plus population depends on farm income.
"This and the change in the international economy are the reasons for optimism," Sinha said.
He said benign inflation would depend on global crude oil prices and domestic farm products.
India's year-on-year inflation rate measured by the wholesale price index fell to 1.44 per cent in the week ended March 16 from 1.51 per cent in the previous week.
The GDP growth in the third quarter of 2001-02 was higher at 6.3 per cent clearly indicating an economic recovery, Sinha said, adding, the quarter was fuelled by value addition in agriculture.
Sinha said he was optimistic that 2002-03 will be a better year as the kharif and rabi outputs will get reflected in value-addition in the manufacturing and services sectors.
He said the international economic situation is changing for the better and will further provide a boost to the Indian economy.