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Small banks or banks for ‘small’ people?

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Reserve Bank of India seen cutting rates next week, first time in 9 months

Jan 25 2013, 09:28 IST
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Reserve Bank of India Governor Duvvuri Subbarao. Reserve Bank of India Governor Duvvuri Subbarao.
SummaryHowever, the central bank remains cautious with inflation around 7 per cent.

But in September it announced big bang reforms in a package of measures to revive growth, saying it would open up its supermarket sector to foreign chains and allow more foreign investment in airlines and broadcasters.

More recently, it gave oil companies more room to set regulated diesel prices and in a sign of a fresh measure that could be in the pipeline, Finance Minister P. Chidambaram said in TV comments aired on Thursday that India should consider hiking taxes for the "very rich".

The moves are intended to bolster investor sentiment, mend battered government finances and stave off a possible credit rating downgrade to junk status.

India's fiscal deficit touched 4.13 trillion rupees ($77 billion) in April-November, or 80.4 percent of the budgeted target for the full fiscal year through March.

The government expects a budget deficit in the current fiscal year of 5.3 percent of GDP.

Economists had pencilled in a deficit of at least 6 percent of GDP, although they have narrowed that to 5.5 percent or 5.6 percent of GDP following the various government measures in recent months.

The country's current account deficit hit a record high of 5.4 percent of GDP in July- September, although Chidambaram said the country can finance the shortfall without cutting into national reserves.

Subbarao, a hawkish outlier in 2012 when many central banks were cutting rates and putting in place other stimulus measures, was due to meet with Chidambaram for a customary pre-policy discussion on Thursday.

In October, the RBI gave uncharacteristically specific guidance, saying there was a "reasonable likelihood" of policy easing in the January-March quarter. It reiterated the same point in December.

"The earlier guidance given by the RBI and the recent steps taken by the government has led to the expectation of a 25 bps rate cut," said Saugata Bhattacharya, an economist with Axis Bank in Mumbai.

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