The Hindu : Front Page : We will respond to U.S. rate cut, says Chidambaram

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Friday, Jan 25, 2008
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We will respond to U.S. rate cut, says Chidambaram

“Government not in favour of putting curbs on capital”

Davos: Five days ahead of the review of India’s monetary policy, Finance Minister P. Chidambaram said New Delhi would respond to the hefty cut in the U.S. interest rates to avert the resultant surge in foreign funds.

“We will respond through appropriate fiscal and monetary measures,” he told reporters at the World Economic Forum here on Thursday.

The Reserve Bank of India’s quarterly review of its monetary policy on January 29 comes on the heels of the surprise 75 basis points cut in interest rates by the U.S. Federal Reserve on Tuesday.

The U.S. rate cut was part of the efforts to stimulate consumption to keep the world’s largest economy from slipping into a recession — fears of which led to a meltdown in the global equity markets.

“We are concerned that it [the U.S. Fed rate cut] would lead to high flow of capital to India. But the government is not in favour of putting curbs on capital. ... We have taken, will take some measures to moderate the capital flow,” Mr. Chidambaram said.

Despite fears of a global recession, the Indian economy was set to grow at 8.5- 9 per cent.

However, high interest rates might have an impact on the growth trajectory, he said. “Our interest rates are set in order to contain inflation,” but the high interest rate put a dampener on growth, he said.

“Fiscal measures would have to be announced in the budget, and monetary measures have to be taken by the Reserve Bank,” said Mr. Chidambaram, who earlier asked the public sector banks back home to lower interest rates to spur consumption.

In the 2008-09 budget, he might address the concerns arising from excessive capital flows.

He, however, declined to specify what the fiscal and monetary measures would be.

Mr. Chidambaram clarified that moderating the inflow of funds did not mean the government intended putting curbs on capital flow.

The rate cut, which has widened the difference between the interest rates in the U.S. and India, would trigger increased capital flows, besides leading to a faster appreciation of the rupee. — PTI

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