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RBI's status quo on rate cut may not enthuse government

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Finance minister Arun Jaitley
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The Reserve Bank of India's (RBI) move to keep the key policy rates unchanged on Tuesday may not have been in line with North Block's expectations. The finance ministry, which has been making a case for a cut in the key policy rates, believes that a rate cut would have provided the necessary impetus to the industry.

In October 2012, when rates were kept unchanged by governor D Subbarao, former finance minister P Chidambaram had said the government would 'walk alone' to face the challenges of growth. This time around, even as finance minister Arun Jaitley has reposed faith in Rajan, Tuesday's decision has not gone down well with the North Block.

A top ministry official told dna on condition of anonymity, "In our opinion, the current economic scenario was favourable for a rate cut. It would have come as a boost to the manufacturing growth." While ministry believes that both consumer price index and wholesale price based index are in a comfortable zone to affect a rate cut, RBI would like to exercise caution, as it has maintained in the statement that there might be an "an upturn in inflation during December 2014-February 2015."

For finance ministry officials, the upgrade of India's rating by the S&P and a sound current account situation at 1.7% of the GDP had been a huge morale booster. Analysts, meanwhile, expect that it will be only post inflation moderation on a relatively consistent basis that the regulator's stance on policy rates would moderate.

Both the policy maker and the banking regulator have different opinions on growth as well. Finance secretary Arvind Mayaram sees growth at 5.7-5.9 % in the current financial year. The policy statement however says, "The projection of growth for 2014-15 is retained at 5.5%. The quarterly growth path may slow mildly in second and third quarter before recovering in the fourth quarter."

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