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RBI must reduce lending rates to boost consumption

The rising inflation rate, which had forced the Reserve Bank of India to keep interest rates high, has hurt consumption demand. The time may just be ripe now for the apex bank to reduce lending costs, bring down firms’ capital costs and also nudge people to spend more on durables such as automobiles.

comment Updated: Nov 18, 2014 00:00 IST

For the most part of the last 12 months, a sticky spell of high prices had been the biggest problem for India’s policy-makers. The latest price data, however, show that the government seems to have got a grip on managing the price conundrum.

The retail inflation rate fell to a three-year low of 5.52% in October. Likewise, the wholesale inflation rate plunged to a five-year low of 1.77% in October, aided by a sharp drop in vegetable and petrol prices.

The ‘manufactured products inflation’ rate, a broad index to gauge price movements of industrial goods, was only marginally lower at 2.43% in October compared to September’s 2.84%, but still higher than last September’s 2.36%.

In the current context, high manufactured products’ inflation, however, may not be that bad news after all. It could imply greater demand and sales of consumer and investment goods, mirroring revival signs for the Indian economy. Besides, a cut in petrol and diesel prices may also be coming as global crude oil costs continue to fall, a move that will aid the government’s efforts to keep inflation low and stable.

The latest data show that the Index of Industrial Production surged 2.5% in September from a flat 0.4% growth rate the previous month, buoyed by robust power and capital goods output.

The manufacturing sector, which constitutes 75% of India’s total industrial output, grew 2.5% in September compared to the 1.4% a year ago. Capital goods output, a proxy for investment activity, grew 11.6% in September, mirroring the fact that companies may have begun to add capacity lines, expecting demand for goods to pick up.

However, the time to open the bubbly may still be some distance away. Consumption spending continues to remain wobbly. That domestic passenger vehicle sales declined during October is a pointer that the people aren’t quite expecting their incomes to grow.

The rising inflation rate, which had forced the Reserve Bank of India to keep interest rates high, has hurt consumption demand. The time may just be ripe now for the apex bank to reduce lending costs, bring down firms’ capital costs and also nudge people to spend more on durables such as automobiles.