Moodys Economy.com has reported that the Reserve Bank of India (RBI) is expected to cut interest rates next week as high fiscal deficit was limiting the Centres ability to step up spending and boost economic activity.
With deficit budgeted at 6 per cent this year and at 5.5 per cent in 2009-10, the government was also constrained in lowering taxes as the fiscal situation would deteriorate further.
Sherman Chan, economist at the Moodys subsidiary, stated, "In fact, the actual fiscal deficits may end up much bigger than projected, as the decline in tax revenue could be more severe than expected, which is likely given the optimistic growth forecast adopted by the government."
With the large public debt weighing down investor confidence, she said, the week fiscal position and the lack of major announcements in the Interim Budget was putting pressure on RBI to use the monetary policy for reviving growth.
Since October, the central bank has already used a mix of policy instruments to pump in over Rs 3, 88,000 crore into the system for supporting growth.
RBI Governor D Subbarao said that there was room for further rate cuts. He said, "The question is whether we should cut rates or not, when should we cut rates and by how much."
The government expected the economy to expand by 7.1 per cent this year, with the growth in the manufacturing slowing down from 8.2 per cent to 4.1 per cent and in construction from 10.1 per cent to 6.5 per cent.
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