Mumbai: Days after government took a series of steps by announcing much-awaited economic reforms, India Inc is pinning its hopes on the Reserve Bank to lower interest rates at its mid-quarter review on Monday.
"It is time the RBI got rid of its obsession with the inflation numbers while completely ignoring grave situation thrown in by constantly decelerating industrial growth," ASSOCHAM President Rajkumar Dhoot said in a statement on the eve of the central bank reviewing its credit policy.
It is merely not enough to pass the blame on government and suggesting that the central bank has run out of the monetary tools in the wake of a large fiscal deficit and the rising current account deficit, the industry chamber said.
Opting for big-bang reforms, the government last week allowed politically-risky 51 per cent FDI in multi-brand retail, 49 per cent investment by foreign airlines in aviation sector and sale of equity in four PSUs.
The decisions came on top of a hike in diesel prices and capping of supply of subsidised LPG to cut oil subsidises. Bankers are also divided on their view on the steps RBI could take on Monday. While SBI chairman Pratip Chaudhuri does not see the repo rate coming down but expects a 1 per cent cut in the CRR, Union Bank head D Sarkar and OBC chief SL Bansal hope the RBI will ease repo rates by 0.25 per cent.
With the recent inflation numbers higher-than-expected and core inflation still on the rise, economists also appear divided.
"...the RBI is not going to be in the mood to cut and we expect it will remain on hold on Monday. The hikes in fuel prices will be welcomed by the RBI, but since the steps will only contain and not prevent fiscal slippage they will not be sufficient to trigger an easing cycle," Leif Eskesen, chief economist for India and ASEAN at HSBC, said on Friday.
After an easing that began with the 2008 credit crisis, the RBI had embarked on a rate hike spree beginning October 2010 which lasted till December 2011. During this time, RBI hiked the repo rate by a whopping 4.25 per cent to 8.50 per cent through 13 consecutive rate hikes.
The central bank, however, reduced CRR by 0.50 per cent in January this year and again by another 0.75 per cent in March to pump liquidity into the system. In April, the bank announced a 0.50 per cent cut in the repo rate.
Experts said that the flurry of events last week with diesel price hike and the third round of monetary easing may have compounded problems for RBI in its battle against inflation. Domestically, the impact of the rising crude could negate the positive impact on fiscal deficit which the 12 per cent diesel price hike would have brought, they added.
"The direct one-time impact of the revision in diesel prices on WPI inflation is expected to be around 60 basis points...the upward price revision of diesel as well as a move to reduce the subsidy burden on LPG paves the way for the RBI to cut the repo rate going ahead," said CRISIL Research.
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