India Inc expects RBI to cut interest rates to boost demand

India Inc expects the Reserve Bank of India to shift direction and throw its bias in favour of reviving growth, sharing concerns not only of the industry but also of the Finance Ministry over the slowdown, an ASSOCHAM survey indicated. Ahead of the credit policy review by the central bank on October 30, the ASSOCHAM did a survey among 210 CEOs and CFOs among different segments of the industry and the service sectors including real estate, banking, automobile, consumer durables and non-durables and the export houses. A vast majority (72%) of the CEOs and CFOs said that it is wrong on the part of the RBI to be obsessed with always using monetary tools to control inflation, as they have a limited use. ''The price rise cannot and should not always be controlled by choking demand, that will be suicidal for growth…In the name of sustainable and long-term growth, we cannot afford to kill the growth which is the only answer to our social and economic problems,'' said the respondents to the survey. The India Inc, the survey indicated, wants RBI to give weightage to Finance Minister P Chidambaram's recent advice stating the central bank should should take ''calibrated risks'' to support the economy. The Finance Minister is quite right when he says that it is now upto the RBI to respond to a credible plan and measures which the government has begun taking to rein in fiscal deficit. Even if the fiscal deficit for the fiscal 2012-13 may not strictly follow the Budget estimates, it is expected to remain much less than 5.5% of the GDP, which is credible given the challenges that are before the economy. It is not going be anywhere near 6%, as is being projected in some quarters. As many 88% of the CEOs and CFOs surveyed cautioned that let RBI not be solely guided by the headline inflation of 7.8% in September. A detailed examination of the disaggregate data shows that the price spiral has got more to do with seasonal issues like potato prices shooting up by over 50%. What must be realized that this 50% hike in potato prices has come about on a low base. Potatoes are selling at the retail level at still Rs 20 a kg. But then, onion prices are ruling at 24% less than September 2011. It is not only money supply which determines the prices of tomatoes and potatoes. On the other hand, a very high cost of finance is choking not only the consumer demand but also making it difficult for the over-leveraged corporate to service debt. ''Corporate debt has mounted. Some of this debt is pretty old and was raised when the economy was growing at 8-9%, the corporate bottomlines were growing. But with the global and domestic economy facing headwinds, servicing debt on high interest coupon rates remains a key challenge for the companies. At this rate, our worst fear is that several of the over-leveraged companies may fall by the wayside making the workforce the worst sufferers,'' the study pointed out. The ASSOCHAM president said it is a paradox that among all the economies of the Asia and Pacific, as indicated by the recent IMF study, the Indian central bank is following the least accommodative monetary policy. For instance, China has managed its inflation related problem with boosting supplies and the rate of inflation has seen drastic drop. ''It will again drive the global economy. However, India may be out of the 'China-India’ growth bracket if we continue to choke our growth for controlling prices of vegetables which in any case are not driven by the banking system,'' the study observed. It said RBI should read signals emerging from the US as well where the consumer confidence is re-building . If India does not take this advantage by easing the interest rates and boosting exports, the Chinese exporters will laugh their way to the American market which appears to be picking up.