Rate cut in the air as growth, not inflation, Government’s new headache

The government has come to a judgement that in the growth-versus-inflation debate, the balance is now clearly in favour of growth and more corrective measures, specifically, monetary actions, such as a further cut in the signal repo rate, need to be taken to help India sustain the growth momentum.

The US Federal Reserve cut interest rates by 0.5 percentage points today, joining a new round of global cuts kicked off by China. China and India increasingly appear to be the world’s last engine of economic growth. China cut its interest rate to 6.66 percent from 6.93.

“Monetary policy (in India) has dual objectives: growth and inflation. The weights have clearly changed in favour of growth,” Arvind Virmani, Chief Economic Advisor in the Ministry of Finance, told The Indian Express in an interview today. (Excerpts tomorrow).

“Producers and other economic players are not clear what is happening to the monetary stance or how the policy will evolve. So, there are apprehensions in the short-term,” Virmani said.

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State Bank of India hikes lending rates 0.5%, others waiting to follow

Banks have started hiking lending rates following the Reserve Bank move to raise the cash reserve ratio (CRR) and repo rate by 0.50 per cent each in a bid to rein in inflation. State Bank of India, India’s largest commercial bank, announced a hike in its benchmark prime lending rate by 0.50 per cent to 12.75 per cent with effect from Friday.

Union Bank of India (UBI) has raised its benchmark prime lending rate by 50 basis points to 13.25 per cent. The new rate will be effective from July 1. Other banks have already indicated that they would be raising the rates in the next few days.

According to SBI, the revision will be applicable to all PLR-related lendings and the bank was only restoring its benchmark rates. This means loans (including home, auto and personal) which are linked to PLR would move up. Usually, floating rates on home loans are linked to the benchmark prime lending rate (BPLR). ICICI Bank and HDFC — two leading players in the home loan segment — are expected to take a decision within one or two days.

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Interest rates are hurting, the slow down has begun

The government has been reiterating its focus on maintaining a balance between managing inflation with growth but it seems to be struggling on both fronts - inflation crossed 5% last week and the latest industrial output numbers released today show a sharp slowdown in growth.

Compared to an 11.6% surge last January, industrial production growth in January 2008 has more than halved to 5.3% hitting key "growth-driver" sectors: manufacturing, capital goods, mining, electricity and consumer durables (which actually saw negative growth).

While production numbers have been slowing down from the double-digit growth seen at the start of the financial year, the January data has shown the sharpest slump, indicating that the Reserve Bank of India's policy of holding lending rates for the past one year in the hope of managing inflation, is hurting.

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