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    Default Budget 2012: The message from Mint Street to Pranab

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    Show me the numbers! Show me some determination! That seems to be the crisp message from Mint Street to Finance Minister Pranab Mukherjee.

    A day before the Union Budget 2012-13 presentation, the Reserve Bank of India (RBI ) Governor D Subbarao has decided to tread a cautious path by staying away from touching the policy rates. The RBI has kept the policy repo rate unchanged at 8.5 per cent. "Credible fiscal consolidation will be an important factor in shaping the inflation outlook," says RBI in its monetary policy review. The biggest danger to monetary policy in the months to come is from inflation, which in turn decides the interest rates.

    In a five-page note on mid quarter monetary policy review, the RBI has said the timing and the magnitude of interest rate cuts will be driven by inflation risk. The upside risks to inflation have actually increased tremendously from the recent surge in crude oil prices to $125 a barrel, fiscal deficit in the range of 5-5.5 per cent of GDP and a vulnerable domestic currency against the US dollar.

    The fiscal slippage is already adding to inflationary pressures. In fact, fiscal deficit is one number RBI is keenly awaiting in the Union Budget. If the finance minister settles for a higher fiscal deficit number (beyond 5 per cent), it is a clear indicator that interest rates are not going to come down drastically in the current year.

    The RBI has also said that while merchandise exports growth has decelerated, the moderation in imports growth was less pronounced leading to a widening of the trade deficit. The RBI has hinted that the current account deficit is likely to remain high because of sluggish global demand and rising crude oil prices.

    "The financing of the current account deficit will continue to pose a challenge so long as the global situation remains uncertain," says RBI. So the trinity of crude prices, rupee depreciation and the fiscal deficit will decide the future of interest rates going forward.

 

 

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