D&B expects RBI to cut policy rates in near future

B D Narayankar

In an endeavor to maintain domestic macroeconomic and financial stability amidst turmoil in the global financial markets, RBI has announced a slew of measures which include cut in CRR, repo rate and SLR.

“The recent cut in the policy rates have reduced the cost of borrowing for banks which they are likely to pass on to their customers in terms of lower PLR. This might provide some required impetus to the investment activity and stimulate demand in the long run,” stated Kaushal Sampat, COO, Dun & Bradstreet India.

“However, the current slump in the exports demand and subdued domestic demand conditions coupled with credit crunch faced by the corporates will adversely impact the industrial production in the near future. We therefore expect IIP growth to moderate and remain close to 5.1% during FY09,” he added.

Sampat further said, “Given the increasing downside risks to the growth momentum coupled with the tight liquidity conditions we expect RBI to cut CRR and repo rate by 50 basis points each in near future."

Reduction in CRR and SLR, coupled with the first installment of agriculture debt waiver scheme, led to augmentation of liquidity to the extent of Rs 2,050 billion. This apart, net injection of Rs 9,279 billion through repo window during Oct-2008 and repurchase of MSS bonds worth Rs 200 billion by the Central Bank helped to ease liquidity pressures in the system, thereby leading call rates to ease.

While a severe liquidity crunch was witnessed in the banking system, bank credit continued to remain robust – registering a growth of 29.03% as on 24-Oct-08 as against 24.78% as on 26-Sep-08.

The substantial increase in bank credit can in part be attributed to drying up of external financing route for corporate sector due to global liquidity crunch and the rise in risk aversion amongst international investors. External commercial borrowing by Indian companies amounted to US$ 8.47 bn during H1 FY09 as against US$ 11.13 bn during H1 FY08.

Further, the domestic stock markets have been in a bearish mode during the last few months, making it difficult for the corporates to raise funds from this route and thereby increasing their recourse to the banking system for raising funds.

Further, high input costs coupled with the rising interest rates have adversely impacted the growth momentum during the first half of the current fiscal as is evident from the slowdown in IIP growth to 4.94% during H1 FY09 as compared to 9.49% during H1
FY08.

Even growth in capital goods production has almost halved to 10.76% during H1 FY09 as compared to 20.05% during HI FY08 which is indicative of moderation in investment activity across industries.

However, going forward, easing interest rates backed by the RBI's easy monetary policy stance are likely to help the corporates to raise cheaper funds domestically and would provide some impetus to investment activity in the long run.

Nonetheless, subdued demand conditions in the domestic economy and a slump in exports growth owning to slowdown in global economy are likely to hamper the industrial production in near future. D&B therefore expects IIP growth to moderate and remain close to 5.1% during FY09.

Article Source: http://www.saching.com