Amid demand for softening of monetary policy to promote growth, the Plan panel said on Friday any move by Reserve Bank to lower interest rate will mainly depend on the government's ability to contain fiscal deficit.
"Interest rate is going to be determined predominately by what happens to the fiscal deficit. The industry is convinced that no matter what happens to fiscal deficit, the RBI will lower the repo rate," Planning Commission Deputy Chairman Montek Singh Ahluwalia said in New Delhi at an Assocham conference.
India's fiscal deficit is expected to be 5.6 per cent of gross domestic product this fiscal as against the budget estimates of 4.6 per cent of GDP.
The central bank is expected to take more steps in its policy review on March 15 to ease liquidity situation to promote economic growth which is expected to moderate to 6.9 per cent in the current fiscal from 8.4 per cent a year
The Reserve Bank in its last policy review reduced cash reserve ratio, the money the banks are required to maintain with the central bank, by 0.5 percentage point to 5.5 per cent to release Rs 32,000 crore (Rs 320 billion) of primary liquidity into the system.
RBI has raised the key interest rate 13 times since March 2010.
Ahluwalia also said: "The determinants of long-term interest rates in India are really going be things like what happens to fiscal deficit and what happens to funds outside the country, which will determine general liquidity".
He expressed concern over that the mounting current account deficit and said, "Can India finance CAD of 3 per cent of GDP, which is about USD 15 billion a year inflow?"
CAD is a reflection of gap between foreign exchange inflows and outflows and is estimated to be 3.6 per cent of GDP.
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