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Not Enough, Cut it Further to Stimulate Demand: India Inc

Published: 05th March 2015 06:00 AM  |   Last Updated: 05th March 2015 03:48 AM   |  A+A-

HYDERABAD: India Inc, while hailing RBI’s suprise rate cut, sought further reduction of repo by 50-75 basis points (bps). According to the industry, a reduction of 100 bps, leading to one per cent, will stimulate consumer demand. So far, RBI has cut repo by 50 bps, but banks are yet to pass it on to consumers.

“The minor rate cut is just not enough to stimulate consumer demand for loans and improve the market conditions in the near term. Even the 25 basis points reduction effected earlier this year did not lead to any pickup in economic activity since the interest rates charged by banks didn’t come down,” said P Balendran, Vice President, GM India.

L&T chief A M Naik too said a 50 bps rate cut was unviable for infrastructure projects to take off. Brokerages, however, said the central bank may ease rates by 50-75 bps this year to revive investments, especially in the infrastructure space.

Terming the rate cut as widely anticipated by the market, SBI Research said the inflation trajectory will and expected to stay benign in FY16. “With RBI shifting to a 4 per cent median inflation target from FY17, we believe most of the rate  cuts will be front loaded in FY16 and there will be a prolonged pause aftermath,” the report said.

Likewise, Morgan Stanley said the RBI was likely to target real rates of around 175 bps and so inflation trajectory will be key to magnitude of rate cuts. “We believe that inflation will decelerate to 4.75 per cent by end 2015 in our base case and 4 per cent in our bull case scenario,” it said.

Chandrajit Banerjee, Director General, CII said “Coming on the back of a growth oriented budget, the unexpected cut in headline interest rate by the RBI sends a huge positive signal that the central bank and the government are working in tandem to provide a robust scaffolding to growth, evenwhile not losing sight of inflation, which has now been made explicit in the objectives of the RBI.”

Banerjee said that “CII has been advocating the need for rate cut to provide a boost to consumption as well as investment demand and the RBI has acted out of turn to respond to this urgency of the economy and industry.

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