Subbarao volleys it back to North Block

The Reserve Bank of India (RBI) on Tuesday obliged with a 25 basis points (bps) reduction in repo rate or the rate at which it lends to banks.

Economists said it was in response to the satisfactory Union Budget produced by the government last month.

Going forward, the government should stay on course on fiscal consolidation and improving governance, said RBI.

“The RBI had put the ball in government’s court long back. The government has responded and I think the RBI has to give the government some time to prove the credibility of consolidation programme,” said Abheek Barua, chief economist, HDFC Bank.

The central bank said that the key to reinvigorating growth is accelerating investment. It added that the government has a critical role to play in this regard by remaining committed to fiscal consolidation, easing supply bottlenecks and improving governance surrounding project implementation.

“Lowering interest rates can only be an enabling factor, projects won’t take off only because interest rates are cut, they need approvals,” said A Prasanna, chief economist, ICICI Securities Primary Dealership.

RBI also cautioned of the implications of raising the minimum support prices on overall inflation.

Meanwhile, economists said the path to achieving fiscal consolidation could be rocky if there were political disruptions going ahead, in light of recent threats by an ally to withdraw support from the governing party.

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