Why corporate India is unhappy with RBI rate cut

Tina Edwin
Tina EdwinJun 02, 2015 | 18:50

Why corporate India is unhappy with RBI rate cut

The Reserve Bank of India cut repo rate - the rate at which it lends to commercial banks - by one-quarter of a percentage point to 7.25 per cent on Tuesday.  This was in-line with the expectation among bankers, economists and analysts, but the cut fell short of what the industry desired. Corporate India wanted at least half a percentage point cut in interest rate to seven per cent.


But RBI governor Raghuram Rajan chose to play safe. Had it not been for pressures from the government and industry as well as some adverse economic data in recent weeks, he would have been happy to hold the rate steady at 7.5 per cent for the moment and revised it after couple of months. After all, he had cut repo rate twice this year, each time by one-quarter of a percentage point, and those cuts were yet to be fully passed on by commercial banks to lenders. This is apparent from the fact that EMIs on home loans and other consumer loans have seen only a marginal change. Banks complain they cannot cut lending rates as their cost of funds is still very high - this is because deposits in current and savings accounts form large chunk of funds that is lent out, and significant part of those deposits are still locked in at high rates.

Rajan said that he could have waited for some time to cut rates but chose to front-load the cut due to still weak investment and the need to reduce supply constraints over the medium term to ensure inflation slowed to targeted four per cent by early 2018. For the moment, inflation is firmly under control, but that is largely due to steep fall in crude oil price last year. However, he warns inflationary risks have risen in recent months for three reasons. Most significant being the anticipation of a sub-par monsoon and its likely impact on food production and price. The second is the recent firming up of oil prices - it averages about $65 a barrel compared to about $50 a barrel few months ago. And, the third is external environment - global growth is still weak and there is conflict in West Asia.


This has made him marginally raise inflation estimate for January 2016 to 6 per cent from 5.8 per cent previously forecast and lower growth projection for the current fiscal year to 7.6 per cent from the previously forecast 7.8 per cent. Sub-par monsoon, increase in service tax from 12.5 per cent to 14 per cent effective June 1 has influenced these revision.

Predictably, corporate India felt the RBI should have accorded growth a higher priority, with deeper interest rate cuts.

"The need of the hour is to propel demand. With several projects being unclogged by government and public investment being stepped up, there is a case for crowding in private investment," said FICCI president Jyotsna Suri in a statement here. Private investment would take place with a push in the form of lower lending rates, she said urging banks to reduce lending rates.

The industry is also worried that the RBI will not cut interest rates any further. The governor indicated as much, while assuring cuts if the economy continued to experience disinflation and monsoon performed well. But those are variables.  

Director-General of Confederation of Indian Industry Chandrajit Banerjee said expectation was at least a 50 basis points cut.  "We at CII strongly feel that the accommodative monetary policy stance should be maintained to boost consumption demand and trigger the investment cycle.  Many stalled projects, which are waiting for availability of credit at cost effective rates, would find it viable to restart operations if the RBI continues with its rate easing cycle," he said in a statement.


PHD Chamber of Commerce and Industry president Alok B Shriram stated the repo rate must not be more than six per cent to induce demand and refuel industry growth at this juncture.

The RBI governor rightly pointed out that the government too needs to take several steps in rein in inflation. The RBI is for the moment watching how the government tackles any crisis that may arise from poor monsoon - particularly its management of food production and price. The government has to also continuously deliver on driving up growth - and that comes from spending on creating infrastructure and ensuring budgetary allocations to various ministries for development projects are spent efficiently.

Last updated: June 02, 2015 | 18:50
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