Subsidies, wages limit interest rate cut: RBI

While maintaining a soft interest rate stance for 2003-04, the Reserve Bank of India on Tuesday cautioned on limited potential for further reduction in interest rates due to subsidies, administered prices and rigidities in wage structure.

The apex bank cut the bank rate by 0.25 per cent to 6 per cent and proposed to maintain adequate liquidity in the system for a soft interest rate environment in 2003-04, RBI Governor Bimal Jalan said in the Monetary and Credit Policy for 2003-04.

The inflation rate is likely to be benign and likely to fall in the second quarter, depending on the monsoon and oil prices, he said.

Some structural factors like subsidies, administered prices and wage structure contribute to inflation and nominal interest rates in India - which are somewhat higher than those in industrial or fast growing emerging markets, Jalan said.

The cut in the cash reserve ratio also by 0.25 per cent to 4.5 per cent was expected to release additional Rs 3,000 crore (Rs 30 billion) into the system.

Jalan said there no revision was likely in the bank rate until the monetary situation demands and added that repo rate, which was left untouched in the policy, was likely to remain flexible. It was reduced to 5 per cent in March.

The present monetary policy may be reviewed if the demand pressure emerges and the inflationary situation worsens, the RBI governor said.

Jalan said the nominal and real interest rates are relatively low due to normal conditions and overall stability in the macro-economic environment.

There may not be significant potential for further sizeable downward movement in interest rates, the RBI governor said.

He said the fixation of some food and other procurement prices by the government has an impact on determining prices of these items.

The need for adjusting several administered and other food subsidies increase the burden on the current expenditure, contributing to high fiscal deficit, he added.

The rigid wage structures with built-in inflation related hike in wages, dearness allowance in organised sector also act as a constraint, the apex bank said.

PTI