The rate hike by the Reserve Bank of India (RBI) to control inflation will lead to a “less high growth rate” for the country, as demand is expected to moderate as a result of the central bank’s move, finance secretary TV Somanathan said on Thursday.

“When interest rates go up, demand is expected to moderate and that’s part of the reason for increasing the interest rates,” he told CNBV TV18. He, however, added that despite the effect of rate hike on demand, “India would still be one of the fastest growing economies”.

The official said the government has not told the RBI to manage yields for its borrowings, as “interest rate is a monetary policy tool to calm inflation”. He was responding to reports that the central bank may buy government debt to put a lid on elevated yields.

The 10-year G-sec yield had gone up by 31 basis points last week after the central bank hiked the benchmark lending rate by 40 basis points, in an out-of-cycle action on May 4.

“The government is in constant conversation with the RBI at all times — good times, bad times, normal times and abnormal times — as the RBI is the government’s debt manager,” he added.

The official said higher interest rates is unlikely to hit the capex plans in the private sector, which does not take investment decision based on interest rate alone.

Despite likely about Rs 1.8 trillion additional expenditure on subsidies on fertiliser (about Rs 1 trillion) and food (Rs 0.8 trillion on free grains scheme in H1), Somanathan said he didn’t see any reason for a fundamental change in fiscal policy at this point.

“Some of the numbers have changed, but the changes have been on both sides of both expenditure and revenue. So in terms of the net fiscal position, we’re not very different from where we were on February 1,” he added.

Somanathan had told FE recently that additional subsidy expenditures would likely be offset by additional tax and disinvestment receipts in FY23. According to an FE estimate, the Centre’s net tax receipts, net of transfers to the state could be a steep Rs 1.7 trillion higher than the BE of Rs 19.35 trillion in FY23. The tax receipts are to be boosted by robust mop-up of direct taxes and the higher-than- expected goods and services tax (GST) collections. Additionally, proceeds of about Rs 21,000 crore from LIC’s IPO will come in as extra receipts as this was not factored in the Budget for the current fiscal year.

On GST compensation requirement after the five-year guarantee on revenue ends on June 30, the official told the TV channel that GST Council is seized of the matter.
“But, I think the problem (revenue constraints of states) is of a smaller size than we might have thought a year ago.”

Gross GST collections have been robust in recent months with April showing a record Rs 1.68 trillion. The average monthly GST collection FY23 may average about `1.3-1.35 trillion as against Rs 1.2 trillion factored in the FY23 Budget.

However, there could still be a shortfall in GST revenue growth compared with 14% annually guaranteed by the Centre as included compensation and back-to-back loan arrangements in the past two years.