Corporate India gears up for RBI action in May.
By R. Chandrasekaran
Corporate India is gearing up all its ammunitions to seek further cut in interest rates when the Reserve Bank of India meets next time on May 3 for the annual review of its monetary policy.
The stage seems to be in favor of a further easing of interest rates. However, the weakening current account deficit will make the RBI in a piquant position. On Monday, the government announced inflation of 5.96 percent for March versus 6.84 percent in February, probably the lowest in more than three years period. The latest inflation data is also lower than what the government had predicted for the fiscal year 2013-14. Economists were reportedly estimating inflation of around 6.4 percent.
The inflation data comes on the heels of Index of Industrial Production (IIP) for February that skid to 0.6 percent following power generation contraction besides mining output and bad show from the manufacturing.
Even before the announcement of inflation figures, trade bodies have called for interest rates cut ranging between 50 basis points and 100 basis points to stimulate growth. While FICCI believes that the current situation should allow the RBI to cut interest rates, Confederation of Indian Industry expects 50 basis points reduction in cash reserve ratio and repo rate. PHDCCI went a step further and sees room for one percentage point reduction in interest rates.
Aside from this, the auto sector suffered the worst probably in a decade to record a fall in annual sale of new cars. The higher interest rates on automobiles and homes have dented buyers’ interest. Reports of European car makers seeking import duty cut has also forced many automobile companies to raise their voice against such proposal as it could hamper the domestic industry and investments.
Meanwhile, in a significant development, India’s CRISIL, a rating agency, has cut down its economy forecast to 6 percent from its earlier 6.4 percent blaming weak pick-up in consumption, higher interest rates, and issues surrounding on project approvals. This will undoubtedly be a dragger on manufacturing sector. The government had earlier projected economy to rise 6.1 – 6.7 percent for the next fiscal year.
Following the inflation announcement, Planning Commission deputy chairman Montek Singh Ahluwalia sees further room for easing of inflation in the coming months.He told the press in Delhi that, “The fact that this is the first time (in over 3 years) it is below 6 per cent, is very important and I hope that we will continue to see that often.†He added, “I have to say that monthly numbers can jump around but it has been our view that in a gradual way inflationary pressure is coming downâ€.
While the indication points to a rate cut in the pipeline when the RBI meets on May 3, it remains to be seen whether it will satisfy the Indian corporate to allow them with necessary ammunition to stimulate growth.
To contact the author, e-mail:Â rchandrasekaran@americanbazaaronline.com