RBI has more room now to ease interest rates, boost investment

Tags: News
Suggesting that lower interest rates were crucial for spurring growth in India, the economic survey has also stated that the cooling off inflation gives the Reserve Bank of India more room to ease rates.

“Lower interest rates could provide an additional fillip to investment activity for the industry and services sectors, especially if some of the regulatory, bureaucratic, and financial impediments to investment are eased," it said.

India cannot take the external environment for granted, and as to move quickly to restore domestic balance. The government, the survey said, is committed to fiscal consolidation. And this along with demand compression and augmented agricultural production should lead to lower inflation, giving the RBI the requisite flexibility to reduce policy rates.”

Jahangir Aziz, chief economist, JP Morgan, said, “Interest rates are, however, a small component of the overall factors that influence investment decisions of industry and also the growth. The growth in India is impacted as the lack of confidence both in the global economy and the Indian economy. As the inflation comes down, the RBI will cut rates which will have to be backed with concrete policy action from the government.”

Siddhartha Sanyal, chief economist, Barclays Capital, said, “We expect the inflation to come down giving room for the RBI to ease rates and spur growth.”

It also blamed the high inflation to have skewed the domestic saving patterns, which resulted in savers putting more money in physical assets like gold, real estate, cars and other physical assets rather than financial products. So though the savings rate in India is still robust at 30.8 per cent of GDP the pattern of savings have shifted to physical assets.

The survey said, “Efficient intermediation by financial markets leads to higher economic growth by increasing savings and their optimal allocation for productive uses. A shift of our growth trajectory to the pre-crisis level of over 8 per cent and above critically depends on efficient financial intermediation between savers and borrowers.”

Anubhuti Sahay, senior economist, Standard Chartered Bank, said in a release, “The investment cycle needs to be kick started as it has weighed on the overall level of economic activity and has simultaneously accentuated the supply side constraints exerting upward pressure on inflation. The adverse impact of inflation is well reflected in lower savings rate, wider CAD and still elevated interest rates for investments."

The strong post-financial-crisis fiscal and monetary stimulus in India led to spectacular growth in the immediate aftermath of the crisis. But with corporate and infrastructural investment not keeping pace, and food production constrained, the boost to consumption eventually led to higher inflation. And falling savings, partly as a result of government spending and partly as a result of high inflation, have led to a widening CAD, the survey added.

India has seen the longest tightening cycle of 15 months starting from March 2010 to October 2011, when the key policy rates was tightened by 375 basis points. “Monetary policy has been tightened, even as global headwinds to growth have increased. India has been caught in a vicious circle of falling growth and stimulus withdrawal.”

Of some concern is India's increased dependence on foreign borrowing even as growth has slowed, “ the survey added.

However, monetary policy started becoming a little more accommodative in 2012-13. A moderation in inflation created space for the RBI to reduce policy rates and take other measures for improving liquidity in the system. The policy rates were cut during 2012-13, including a reduction of 75 basis points (bps) in the repo rate in two steps (50 bps in April 2012 and 25 bps in January 2013), a reduction of 100 bps in the SLR in August 2012, and a 75 bps cut in the cash reserve ratio (CRR) in three steps (25 bps effective September 22, 2012, 25 bps effective November 3, 2012 and 25 bps effective February 9, 2013).

Post new comment

E-mail ID will not be published
CAPTCHA
This question is for testing whether you are a human visitor and to prevent automated spam submissions.

EDITORIAL OF THE DAY

  • For those who are left to survive a war-torn world, let there be peace

    The hunger games have begun, and they have started reaping our children. There is no way around it.

FC NEWSLETTER

Stay informed on our latest news!

INTERVIEWS

GV Nageswara Rao

MD & CEO, IDBI Federal Life

Timothy Moe

Goldman Sachs

Chander Mohan Sethi

CMD, Reckitt Benckiser India

COLUMNIST

Urs Schöttli

Shifting sands in the Far East

As was to be expected, Japanese prime minister Shinzo Abe ...

Zehra Naqvi

When humanity died, bestiality prevailed

The terrorist attack that killed 132 children in Peshawar has ...

Bubbles Sabharwal

Why self-esteem must be your best friend forever

Two negatives do make a positive! Imagine no doubts, no ...

INTERVIEWS

William D. Green

Chairman & CEO, Accenture