• APRIL 22, 2003

Rate cut matters?

Before the actual GDP growth figure for FY03 could come out, the estimates for GDP growth in FY04 have already started coming in. One of the more prominent of the estimates is the one given by the RBI governor (6%). But more than the GDP estimate what could have a far-reaching impact on the economic growth of the country is the monetary and credit policy that is to be announced later this month.

For one, the focus will be on the RBI governor again because there are expectations of a further cut in bank rate and Cash Reserve Ratio (CRR). At this moment, a rate cut will be a healthy measure, as despite the RBI's steadfast policy of a soft interest rate regime, lending rates have not fallen as much as deposit rates. But since the RBI has given banks a free hand as far as setting their prime lending rates it is a matter of opinion whether the rate cut will be of much consequence. However, a move to cut rates will further indicate the seriousness of the apex bank's vision for softer lending rates on the ground.

While the RBI's policy on interest rates is clear, banks have not exactly adhered to this policy, i.e. they have not exactly toed the RBI line and reduced interest rates. This means that the RBI can only go as far as indicating that a more borrower friendly interest rate is required, banks may or may not adhere to the same (read more). Thus it remains to be seen what impact a new rate cut is likely to have on the lending by corporate India. That apart we must also recognize that the demand side in the country presently is not exactly robust. Going forward a lot is likely to depend on the monsoons for the demand to pick up. In such a scenario, existing capacities are adequate to cater to the current demand.

This means that it will be a while before demand will actually outstrip capacity and Indian industry will see the need for expanding capacities. To put things in perspective, in FY03, total net credit (total advances minus repayments) has grown at a healthy rate of 12.2% compared to 10.9% in the same period last year. This was mainly led by non-food credit off-take from the infrastructure sector as well as the housing sector. The point we are trying to highlight is that growth in credit off-take in FY03 was mainly fueled by demand from the housing sector as well as the infrastructure sectors. Credit off-take from the Indian industry, especially the core sectors like cement and steel seem to have been more to refinance their existing debt than to expand capacities.

Thus while the RBI's intentions are clear, unless demand picks up it will be difficult to envision a scenario of high credit off-take due to low interest rates. But even in this grim outlook there is a lesson for India Inc., FY03 has shown that Indian industry (at least some of them) are becoming more competitive in the global markets. This can be seen by the rise in merchandise exports from the country. Who knows lower interest rates could actually spur Indian companies to look at the export market for growth options.

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