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Indian industry pins hopes on a rate cut in policy

Leading Indian industry groups said they hoped the central bank would cut the benchmark bank rate when it announces its mid-year review of monetary policy on Tuesday to signal its commitment to soft interest rates.

Lobby groups such as the Confederation of Indian Industry and the Federation of Indian Chambers of Commerce and Industry would like the Reserve Bank of India to cut the bank rate by 100 basis points from 6.5 per cent now.

"There is a slight fear in the industry that interest rates might harden in the long run, primarily owing to the increased government borrowing programme," CII's Chief Economist Omkar Goswami said on Monday.

"Given that backdrop, a rate cut would signal RBI's renewed commitment to maintaining a soft interest regime."

The central bank last cut the bank rate a year ago to a three-decade low. Banks use this key rate to price loans.

The Indian government has a gross borrowing target of Rs 1.43 trillion for the year to March 2003, of which it has already raised Rs 1.1 trillion.

FICCI said a cut of at least 100 basis points to 5.5 per cent would encourage banks to lower prime lending rates--which they charge blue-chip clients--to below 11 to 13 per cent, which they have retained for more than two years.

"A reduction in the interest rate will certainly help reduce the cost to industry," said Amit Mitra, secretary general of FICCI. "This is important as (the low) inflation rates have continued to push up the real interest rate."

The country's inflation on the year, as measured by the wholesale price index, fell to 2.83 per cent in the week ended October 12, from 3.02 per cent the previous week.

Inflation has remained low even though India has had to grapple with its worst drought in 15 years, which was expected to push up food prices.

Recovery Horizon

A slew of economic data in recent months point to a revival in the industrial sector after it slowed down in 2001, raising hopes that the world's 12th-largest economy is on the path to a strong rebound.

Both CII and FICCI said they were optimistic about the industrial revival containing in the short-term as first-quarter corporate results have been encouraging.

But they felt the low inflation rate gave the central bank leeway to cut rates, which would help lower costs and boost companies' bottomlines.

In April, the central bank had hinted at a shift to a neutral rates stance as tentative signs of an economic revival appeared on the horizon. It promised to cut the bank rate 50 basis points if cash tightened and inflation remained low.

CII's Goswami said the drought was unlikely to be a significant drag on economic growth.

Increased growth in the manufacturing and services sectors would push overall GDP growth to between 5.25 per cent and 5.5 per cent, making India one of the fastest growing economies in Asia, he said.

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