India Inc calls for lower rates to boost investment

Written by fe Bureau | Mumbai | Updated: Oct 31 2012, 07:57am hrs
India Inc expressed disappointment that the Reserve Bank of India decided not to lower interest rates, as pressure builds on the government to take further steps to rejuvenate economic growth and contain fiscal deficit.

The RBI signalled no further policy easing until the January-March quarter and kept the repo rate, or the rate at which it lends to commercial banks, unchanged at 8%, squashing hopes for lower rates from sensitive sectors such as banks and real estate.

The industry was expecting rate cuts to boost investment growth. But it did not happen. Lowering of rates is required to encourage investments in supply side infrastructure rather than squeeze investment demand with unaffordable interest rates, said JSW Steel JMD & Group finance chief Seshagiri Rao.

While a 25 basis points reduction in cash reserve ratio (CRR), or the portion of deposits that banks have to keep with the RBI, could provide a spot of relief as it would help increase liquidity, some experts felt the move would change little.

The reduction in CRR by 25 basis points,while leaving the policy interest rate untouched, reflects that inflation remains a near-term concern for the RBI, said RV Kanoria, president of Federation of Indian Chambers of Commerce and Industry.

Rao said the CRR cut may not ease the situation as it frees up just R17,500 crore while banks borrow in excess of R75,000 crore under the repo window from the RBI.

The RBI did not lower rates in spite of heightened political pressure from the government, which last month unveiled a slew of fiscal and economic reforms. The latest policy intensifies pressure on finance minister P Chidambaram, who on Monday pledged to contain the fiscal deficit. The real estate industry also heavily criticised the RBIs latest credit policy.

The cost of funding of real estate is very high and home buyers as well as developers expect the RBI to come out with positive policy and facilitate drastic reduction in interest rate, said developers apex body Credai national president Lalit Kumar Jain.

The Credai called the RBI stingy and urged it to drop what it termed a negative approach towards realty sector.

Some analysts had also hoped for a reduction in interest rates ahead of the Diwali holidays to improve consumer sentiment.

The RBI raised its estimate for wholesale price inflation to 7.5% from 7% while cutting baseline economic growth forecast for the fiscal to 5.8% from 6.5%.

The problem is that with rising inflation, there is no pricing power at present. The producer is not able to pass on increased costs, while consumers end up paying more. High inflation will block further investment, and this a worry, said Rao.

However, in a rare positive comment, Kanoria welcomed the RBIs indication that it is open to review the policy further in sync with fiscal deficit containment and other measures, once inflation eases. The BSE Sensex and Nifty posted their biggest fall in three weeks, turning the indexes into the worst performers in Asia on Tuesday.