Fed rate cut likely to influence RBI policy

Recessionary fears in the global economy, slowdown in domestic industrial production in November 2007 and the widening gap between the US and Indian interest rates have set the stage for a policy rate cut by the RBI tomorrow, an Assocham CEO survey today revealed.

Majority of the 285 CEOs surveyed by the Assocham Business Barometer (ABB) felt that the Indian economy caught between early but tentative signs of sluggish domestic growth and weakening global demand would require policy support to retain the growth achieved consistently for the past three years.

As many as 84% of the respondents of ABB done prior to the RBI policy review hoped for a cut in the repo rate by the Reserve Bank in view of the 75 basis points reduction in the Federal Reserve Rate.

The corporate heads felt that the interest rates had reached their peak and were in fact hurting industrial growth. Around 90% of them said the continuous policy inaction of the regulator could hurt the business confidence.

While 70% of the respondents felt that ideally there should be 50 basis points cut in the repo rate along, 5% said the reduction could be only 25 basis points.

"The industry expects the central bank to undertake moderation in interest rates under the global as well as domestic compulsions," said Venugopal Dhoot, president, Assocham.

In view of the bleak outlook for the US economy, currently undergoing slump in housing market, strained financial markets, rising unemployment rate, softening in overall economic activity, the Federal Reserve has reduced its interest rate by 75 basis points.

"A possibility of further reduction is not ruled out," Assocham said.

Further slashing Fed rate would create the situation of "arbitrage opportunities" for the global investors wanting to shift their funds from the low yield US and other developed markets, to high-return Indian market, which could lead to a surge in the capital inflows and the aggravation of complication caused by the appreciating rupee.

The RBI has been following the tight monetary policy to avoid the inflationary pressures built up with around 9% growth in the economy and major supply constraints.

The CEO poll cited rise in global food and oil prices as the major impediment to a move by the central bank for a rate cut.

The rise in borrowing cost coupled with rise in exchange rates in favour of rupee had led to slowing down in the export-oriented manufacturing and construction which had a bearing on employment, the chamber said.

While the the overall growth rate of manufacturing has come down to 9.8% for the period April-November 2007 as compared to 11.8% a year ago, the consumer durables sectors have recorded a decline of 1.7% for the eight month period against of 12.4%.

92% of the respondents in the survey believed there was no absolute "de-coupling" of Indian economy with that of the US.

"RBI Governor has given an indication that the monetary policy will take into consideration the global situation," Assocham said.