India’s corporations are now pinning their hopes on the government to revive the slowing economy through administrative steps, after the Reserve Bank of India (RBI) left key policy rates untouched in Tuesday’s first quarter monetary policy review.
“Monetary review is just one part of the whole business environment and RBI has to also think of inflation pressure before rate cut,” said K Venkataramanan, managing director and chief executive officer of India’s largest engineering and construction company, Larsen and Toubro Ltd.
“What I am hoping is total acceleration on clearing up some of the road blocks by the government. This is in terms of allowing land acquisitions, as projects are getting stuck because of that and coal linkages to power companies, without which you cannot grow at eight per cent,” he added.
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“The need of the hour is administrative action on the part of the government to ease supply bottlenecks which will help ease inflationary pressure” |
Rahul Bajaj
Chairman, Bajaj Auto Ltd
Rajeev Talwar
Group Executive Director, DLF Ltd
RBI Governor D Subbarao left the apex bank’s repurchase rate, at which it lends money to banks, unchanged at eight per cent on Tuesday, while the reverse repurchase rate, or its borrowing rate, was left at seven per cent.
Though he cut the Statutory Liquidity Ratio (SLR), the portion of deposits banks need to invest in liquid instruments, mainly government bonds, by 100 basis points to 23 per cent and thereby freed up an additional Rs 60,000 crore for banks to lend, the move is not seen as much of a help in the light of high interest costs.
The governor also raised his inflation forecast to seven per cent, as rupee depreciation, infrastructure bottlenecks and higher food costs stoke price pressures. This situation could further deteriorate by the impact of a feeble monsoon on crops.
India’s headline inflation stood at 7.25 per cent in June, while food inflation rose to 10.81 per cent in June from 10.74 per cent in May. This season’s poor monsoon (21 per cent less than normal) would shoot up food prices further, according to experts.
“The need of the hour is administrative actions on the part of the government to ease supply bottlenecks which will help ease inflationary pressure,” said Chandrajit Banerjee, director general of the Confederation of Indian Industry.
Prime Minister Manmohan Singh is grappling with a budget deficit and discord in the government that has undermined efforts to turn around a slowdown in investment. Singh, who took over the finance portfolio in June, has vowed to revive investor confidence after rating agencies Standard and Poor's and Fitch Rating warned they might strip the country of its investment-grade credit rating.
India’s gross domestic product growth slowed to a nine-year low of 5.3 per cent in the March quarter, triggering fears of a sharp slowdown in economic expansion.
“Beyond policy review, what is expected is good governance at the Centre and states, which will reduce inflation and improve the investment climate,” said Rahul Bajaj, chairman of two-wheeler maker Bajaj Auto Ltd.
Speaking about the real estate industry, one of the worst-hit due to high interest rates, Rajeev Talwar, group executive director of DLF Ltd, India’s largest real estate developer, said: “Lower rates and quicker approvals are the answers for all questions in the real estate sector. The RBI governor has raised interest rates 13 times to tame inflation, but nothing has happened. They should think out of the box to tame inflation and aid growth.”
The monetary review, might, however, brings in some relief to good quality borrowers, as banks could offer marginal discounts to woo corporations amid slowing credit offtake.
“Marginal rate reduction is undoubtedly overdue,” said Prabal Banerji, chief financial officer of Adani Power Ltd. “Nevertheless, liquidity creation through lower SLR may lead to easing of interest rate for good quality borrowers.”
