RBI's KC Chakrabarty counters Gokarn on possibility of rate cut

MUMBAI: Reserve Bank of India Deputy Governor KC Chakrabarty on Friday said interest rates in India were not too high to impact growth, throwing cold water on hopes of central bank action to revive a sputtering economy.

This comes only days after fellow Deputy Governor Subir Gokarn raised expectations of a rate cut by saying moderate core inflation and softening global crude prices offered the central bank room to lower policy rates.

"I don't think that rates are so high that they can significantly impact corporate growth," Chakrabarty said on the sidelines of a seminar in Mumbai, just 10 days before the central bank's mid-quarter review of the monetary policy.

The Sensex fell after Chakrabarty's comment, but recovered from losses to end up 0.4% at 16,719 points. It had risen over 400 points on Monday following Gokarn's statement.

The index ended the week higher by 754 points, the largest weekly gain since January.

Chakrabarty, in seeming contrast to Gokarn, appeared to deflate all hopes of a rate cut. "The cost of borrowing will not come down significantly for corporates even if rates are cut," he said.

India's GDP growth plunged to a nine-year low of 5.3% in the three months to March, according to official data released on May 31, putting pressure on the RBI to cut rates at its policy meeting on June 18. Repo rate, the rate at which the RBI lends to other banks, is at 8% while the cash reserve ratio (CRR) is at 4.75%. CRR is the portion of deposits banks are required to keep with the central bank.

Chakrabarty said the RBI's top priority now was to rein in inflation, which stood at an average 7.1% in the first four months of 2012 against 9.5% last year. He said rates could fall only if inflation came down, adding that infrastructure projects in the country had not suffered because of lack of financing.

Chakrabarty also said the RBI would want banks to put in place a proper rate transmission mechanism, referring to the token 25-basis-point cut in lending rates by commercial banks even as the RBI reduced CRR by a cumulative 125 basis points since January.