Indian interest rate cut on the horizon

Remarks by India’s finance minister fuel speculation that a reduction in interest rates could be forthcoming.

Newly appointed Finance Minister P. Chidambaram’s comments earlier this week that the government was planning fiscal consolidation steps to ease high borrowing costs afflicting consumers is being seen as a sign of an impending and welcome monetary easing.

Chidambaram's comments revived this prospect just a week after the Reserve Bank of India (RBI) disappointed investors by freezing the repo rate and sticking to its hawkish language on inflation.

Traders said Chidambaram's statement means the government could start to exert pressure on the RBI to ease interest rates. One analyst believes people are expecting that Chidambaram will influence RBI to do whatever he wants.

Bond yields fell sharply last week after the RBI's repeated warnings on inflationary pressures led traders to pare expectations for future rate cuts.

RBI Governor Duvvuri Subbarao said the government needs to adopt fiscal reforms rather than rely on monetary policy alone to revive an economy that is growing at the slowest pace in a decade.