Over to RBI, but are rate cuts enough?
Some economists feel that the situation is not as bad and has improved over the past couple of months and RBI governor Duvvuri Subbarao is doing all he can.business Updated: Feb 27, 2009 21:47 IST
The year-on-year GDP growth of 5.3 per cent for the third quarter of 2008-09 raises an alarm on the growth expectations for the full year has increased pressure on the Reserve Bank of India to cut policy rates increase to boost credit expansion in order to bring demand in the economy.
Some economists feel that the situation is not as bad and has improved over the past couple of months and RBI governor Duvvuri Subbarao is doing all he can.
“Rate cuts is all that that RBI can do and is doing which has had its impact,” said Abheek Barua, chief economist, HDFC Bank. “It also has to infuse liquidity and a CRR (cash reserve ratio) cut will help,” he added, referring to the share of deposits that banks must park with RBI as cash.
“There is a scope for repo rate cut and RBI should go ahead with the same,” said Rajiv Kumar, director and chief executive at the Indian Council for International Economic Relations (ICRIER).
A series of CRR and repo rate cuts by the central bank has put pressure on the commercial banks to further cut prime lending rates and bring it down to single digit levels.
While further rate cuts are possible and a measure that the central bank can adopt, bankers have their reservations on its impact. They maintain that first demand has to go up for credit to pick up and for that, fiscal measures involving
government spending are vital.
“Liquidity is not an issue but macro economic adjustments are key to spruce up demand,” said MD Mallya, chairman and managing director, Bank of Baroda. “Only when investments in infrastructure start, sectors like steel and cement would pick up and this in turn will generate demand.”
“Reduction in the rate of interest cannot alone create demand, affordability is key for demand to pick,” said Allen CA Pereira, chairman and managing director, Bank of Maharashtra.