RBI policy review: What will D Subbarao do?

India Inc is expecting Reserve Bank of India (RBI) governor D. Subbarao to cut key rates and inject more money into the system when he reviews the central bank's credit policy on Monday. This will enable banks to lower interest rates on loans for consumers and corporates, which would revive demand and rev up the economic growth rate, which has slowed to a nine year low of 6.5 per cent .

Rajkumar Dhoot, president, Associated Chambers of Commerce and Industry of India (Assocham), is hoping for a 0.5 to one per cent reduction in short-term lending rates and a cut in cash reserve ratio (CRR) for banks.

CRR determines the amount of idle money that banks have to park with RBI. A cut in CRR makes more funds available to them for extending credit. A 0.5 per cent cut in CRR, for instance, injects as much as Rs 32,000 crore into the banking system.



Dhoot said, "The current economic scene is critical as several interest-sensitive segments like automobiles and housing are in the grip of a slowdown. Thus, RBI must use this opportunity for bold announcements."

Industry has been clamouring for relief as high interest rates and rising input costs have adversely impacted their business.

Dhoot pointed out that exports declined by 4.2 per cent to $ 25.68 billion in May due to the unabated slump in global demand and slowdown in domestic industrial growth.

The industrial output growth rate dropped to a negligible 0.1 per cent in April as capital goods production contracted with corporates cutting down on investment, and demand for consumer goods also decelerated.

The Confederation of Indian Industry (CII) also said there is enough room for the RBI to cut interest rates as warranted by the slowdown in industrial growth.

"India has entered a vicious cycle in which low growth is affecting investor confidence, which in turn is leading to capital outflows and a depreciating currency," said Chandrajit Banerjee, director general, CII. "Thus, RBI should not hesitate to cut interest rates," he suggested.

Finance Minister Pranab Mukherjee had recently said: "I am confident that RBI will adjust the monetary policy as we are adjusting fiscal policy to prop up the economy. This has raised expectations of a repo rate and CRR cut."

Pratip Chaudhuri, chairman, State Bank of India (SBI), is hoping for a one per cent cut in the CRR. SBI has started slashing rates and is looking for further relief to raise credit flows.

In April, the central bank reduced the CRR by 1.25 per cent and the repo rate by a more-than-expected 0.5 per cent as the growth rate had turned sluggish. This was a radical departure from the RBI governor's hawkish 20-month rate-hike cycle beginning March 2010, which resulted in interest rates going up by a whopping 3.75 per cent in the fight against inflation.

However, the flipside of the coin was that economic growth was choked as demand for consumer goods such as cars, refrigerators and air conditioners came down drastically and corporate investments were pared down.

Courtesy: Mail Today