India Finance Minister calls for “calibrated risks” from Central Bank

Monday, 15 October 2012 00:00 - - {{hitsCtrl.values.hits}}

TOKYO (Reuters): India’s Finance Minister called on Saturday for the country’s Central Bank to take “calibrated risks” to support the struggling economy as a reciprocal measure to Government fiscal efforts.

In an interview with Reuters, Palaniappan Chidambaram said the government was committed to “fiscal correction”, a nod to rating agencies that have threatened to make India the only BRIC nation with a junk credit status, even accounting for recent economic reforms.

Chidambaram was appointed in August to revive Asia’s third-biggest economy back to its former glory. After growing close to 10 percent before the global financial crisis, years of policy inertia has slowed the rate of expansion to close to 5 percent and a deep budget deficit has put the country’s credit rating in peril.

After loosening rules on foreign investment in retailing and airlines in a set of “big bang” reforms to kick start a revival in the economy, Chidambaram said it was now the Reserve Bank of India’s (RBI) turn to take action.

“It’s a call that the RBI has to take,” Chidambaram told Reuters on the sidelines of an International Monetary Fund meeting in Tokyo, two weeks before the RBI is due to review policy.

“But I hope that the positives outweigh the negatives and that while the government has taken and will take a number of fiscal measures, that these measures will encourage the RBI also to take what I call some calibrated risks.”

The Central Bank has resisted pressure to cut interest rates since April, partly because of concern that inflation was too high and also because it wanted to see the government take action to lift growth, which was 5.5 percent in the April-June quarter, low by India’s recent standards.

“Decision making in life is about taking risks. That’s my view,” Chidambaram said. “But I’m not the governor.”

The Minister might not get his way. Many economists expect the Central Bank to keep its main policy rate unchanged at eight percent at an 30 October policy review.

The Finance Minister argued that India’s sovereign credit rating should not be downgraded by Standard & Poor’s Ratings Services (S&P) as the country’s real and potential growth rates are higher than most countries.

He defended the country’s subsidies programs, saying that the Government was making changes to decrease wasteful spending for some schemes but that some subsidies should not be eliminated for the sake of the country’s poor.