RBI should have cut interest rate to boost growth: India Inc


Business, Economy

Industry argues rate cut would have propelled demand as interest rates remain unduly high.

India's GDP slowed down to 5.7 per cent on the back of demonetisation and GST. (Photo: AP)

New Delhi: Disappointed by the RBI's move to leave the key rate unchanged, India Inc today said the central bank should have accorded precedence to revving up economic growth while curbing inflation.

The industry argued that a rate cut would have propelled demand as interest rates remain unduly high. "In context of the current industrial situation, we felt
there was a need for a further cut in the repo rate.

Growth conditions remain under strain which is reflected in the persistently weak investment activity and the first quarter GDP growth numbers," Ficci President Pankaj Patel said.

"While RBI in the policy statement cites inflationary pressures to remain a concern, Ficci feels that we need to give equal consideration to growth prospects," he added.

The RBI today kept policy rate unchanged at 6 per cent as was widely expected in view of upward trend in inflation even as it cut the growth forecast to 6.7 per cent for the current fiscal.

However, it slashed the Statutory Liquidity Ratio (SLR), the portion of deposits held by banks in government securities by 0.5 per cent to 19.5 per cent, freeing over Rs 57,000 crore to bank funds for lending.

"The Reserve Bank should have taken a bold move and cut the policy interest to boost the growth as the inflation level is still well within control," said Assocham President Sandeep Jajodia.

He claimed that while the RBI is always faced with the dilemma of choosing between growth and inflation, the overall national sentiment at present is for reviving growth and employment as the trade and industrial activity, particularly in the informal sector, is facing some disruption from GST.

"What is not so pleasant is the fact that the credit policy does not give any indication of a rate cut even in the short to medium term, so the ball for growth revival is now completely in the court of the government through fiscal measures," said Jajodia.

He expressed concern over the precarious situation that the manufacturing sector is in, observing that if the trend does not reverse with monetary and fiscal measures it would be difficult for the industry to generate jobs.

"Although a repo rate cut was expected from RBI, a 50 basis points cut in SLR is welcome and is expected to enhance banking sector liquidity in the coming times," said Gopal Jiwarajka, President, PHD Chamber of Commerce and Industry.

"In our view, the scope for further rate cuts this year would be restricted to 25 bps, which would materialise only if the inflation trajectory significantly undershoots expectations," said Naresh Takkar, MD & Group CEO, ICRA Ltd.

"While domestic consumption is likely to remain the chief driver of economic growth in FY2018, a sustainable upturn in investment activity remains elusive, given the challenges faced by the corporate sector and the SMEs, as well as the Central and the state governments," he added.

"RBI listed the rising input costs as a downside risk to the economy but has done precious little for helping the manufacturing and exports," engineering exporters' body EEPC (Engineering Export Promotion Council) India Chairman T S Bhasin said.

He pointed out that Indian exporters are suffering from a 'twin challenge' of rising rupee and GST related disruptions, affecting their cash flow. In its last review in August the Reserve Bank had slashed the benchmark lending rate by 0.25 percentage points to 6 per cent, the lowest in six years.

The Reserve Bank of India (RBI) said that after a record low in June, inflation is trending up and estimated the headline number to touch 4.6 per cent by the March quarter.

On growth, it cut its 2017-18 forecast by gross value added (GVA) basis to 6.7 per cent from 7.3 per cent earlier. The review comes amid heightened fears of a slowdown in growth due to various factors like the demonetisation exercise and the introduction of the indirect taxation reform GST and a shrill call for fiscal boosters from a varied section of economists.

The GDP expansion slowed down for the sixth straight quarter to 5.7 per cent which is a three year low under the new series of computation for the June quarter.

The government has been working on a plan to push up growth, but has not announced any move yet. It cut the excise duty on fuels by Rs 2 in order to minimise the impact of increasing global fuel prices on domestic consumers, a move which heightens the risk of a fiscal slippage.