Low Inflation boosts calls for rate-cuts from Industry

With wholesale inflation dipping to record lows, industry asssociations have renewed their calls for an immediate cut in interest rates.

ASSOCHAM for example has sought a repo rate cut of up to 50 basis points (bps) in its fifth bi-monthly monetary policy review scheduled on December 2nd, if monsoon forecast for 2015 is normal, crude oil prices average sub-$95 per barrel and exchange rate volatility remains contained.

“A firm anti-inflationary stance over the remainder of FY15 would help to rein in expectations and impart credibility to the RBI’s inflation targets as the economy adjusts towards the medium term inflation target of CPI inflation at 4+/- 2 per cent,” said The Associated Chambers of Commerce and Industry of India (ASSOCHAM) in a communication addressed to the Central Bank governor, Raghuram Rajan.

Assocham and other industry associations have regularly blamed Reserve Bank of India’s high interest-rate regime for keeping India’s industrial growth in check.

However, despite the high rates, growth has started returning, while inflation has fallen as the RBI had wanted.

“Considering that there is a better macro-economic situation subsequent to last monetary policy, the RBI’s next bi-monthly monetary policy is critical for the industry amid expectations of a reduction in key interest rates this time and the apex bank should take all global and economic factors in consideration,” said Mr D.S. Rawat, national secretary general of ASSOCHAM.

The inflation based on the consumer price index (CPI) for September 2014 moderated to 6.5 per cent from an average of about 10 per cent in 2012-13 and 2013-14 and this easing of inflationary pressures is expected to continue in the immediate term, thereby benefitting from factors like easing global commodity prices, a decline in domestic fuel prices, slowing growth of rural wages and a favorable base effect.

Notwithstanding the expected pickup in headline CPI inflation following waning of favorable base post November 2014, ASSOCHAM expects that CPI inflation in January 2015 would be well below the target of eight per cent as per the glide path announced by the Reserve Bank of India (RBI).

Moreover, lower commodity prices would soften the impact of any revival in demand conditions going forward, thereby containing inflationary pressures.

In its note to the RBI chief, ASSOCHAM has also maintained that there is a risk that easing of inflation on account of exogenous factors like lower commodity prices, may delay introduction of some much needed but difficult supply side reforms that would structurally address domestic factors that keep inflation high.

Additionally, monsoon dynamics and extent of rise in minimum support price (MSP) would impact food inflation in 2015-16.

Overall, ASSOCHAM opined that achieving the target of restricting CPI inflation below six per cent by January 2016 remains uncertain.

Though global crude oil prices are expected to remain moderate in the months ahead owing to adequate supplies, however in the event that crude oil prices strengthen, the transmission to output prices in India would be relatively faster as prices of major fuels including diesel is market-linked.

Besides, higher rates in the spot market in some regions as a result of the shortfall in monsoon rainfall and hydroelectricity generation are likely to lead to a modest rise in fuel and power purchase adjustments in coming months.

However, considerable tariff increases remain a risk factor for 2015-16, particularly if pass through of prices of pooled coal/gas imports is permitted, said ASSOCHAM.

The chamber has also expressed concerns over substantial shortfall in production of various kharif crops (as per advance estimates) in 2014 as compared to 2013 like pulses (14 per cent), coarse cereals (14 per cent) and oilseeds (12 per cent) which remains a key near term risk.