Industry hopes RBI will cut rates after government moves to cut spending

Will the Reserve Bank of India cut policy interest rates for the first time in almost a year even as price inflation remains above its comfort zone?

Hit by slowing growth and declining demand, the industry sure hopes so.

The RBI has been raising interest rates steadily for the last four years. Its official lending rate, at which it offers money to commercial banks, was 4.75% in April 2009. By late 2011, due to relentless increases, it nearly doubled to 8.5%. It was only in April 2012 that the RBI again cut the repo rate to 8%.

However, for the last nearly one year, it has held the rate at the 8% level, waiting for the government of India to get its finances in order.

The Reserve Bank typically keeps interest rates high when prices of essential commodities, such as food, rise. Price rise, in turn, is caused mostly by profligate spending by the government, international increases in oil prices etc.. The government has, in the past six months, taken action to reduce its spending.

The high rates have hit industrial growth, but are yet to bring down food prices as much as desired.

Industry association Assocham said it wants the RBI to cut rates by 1 percentage point when it reviews the monetary policy tomorrow.

“It is time the Reserve Bank of India went in for a bold move and slashed the REPO rate by at least 100 basis points,” the association’s president Rajkumar N Dhoot said. “Only then will the prolonged high interest rate cycle be broken and the growth would get some breathing space for revival.”

Dhoot said the tight money policy pursued by the RBI has only led to demand depression hitting the industrial growth and affecting the overall business confidence. Sales in the interest-sensitive automobiles and the housing sectors, which have a cascading economic effect, have remained flat or declined from the quarter to quarter, he said.

“The answer to the inflation lies in boosting supply and removing those constraints blocking it. It does not lie in demand depression. In fact, once supply is given a boost, it will serve the double purpose of controlling inflation and jacking up the industrial growth. By staying obsessed with choking the credit line for controlling price rise, the RBI has not really succeeded. We strongly advise the central bank to change tack and shift gears decisively. Any half-hearted measures would neither take the economy here or there,” he said.