World Economic Forum: Finance Minister Arun Jaitley pitches for rate cut

NEW DELHI: Calls for an interest rate cut reverberated through the World Economic Forum's India Economic Summit in Delhi with industry leaders adding their voices to a rising crescendo that RBI Governor Raghuram Rajan will find difficult to ignore against the backdrop of a shaky economic recovery and a benign outlook for inflation with commodity and energy prices plummeting. The next monetary policy review is on December 2.

Industry leaders backed Finance Minister Arun Jaitley's view that a rate cut would benefit the economy, which hasn't yet shown definitive signs of turning around after a prolonged slump.

"This is the time when inflation, led by fuel, is not a problem anymore. I think it might be time for RBI to cut interest rates," said Anand Mahindra, CMD, Mahindra Group, speaking at the summit organised by the World Economic Forum and Confederation of Indian Industry.

Inflation measured in terms of the wholesale price index (WPI) touched a five-year low of 2.38% in September. Retail inflation dropped to 6.46% in September, the lowest since the new series of the consumer price index (CPI) was released in January 2012. Rajan has been relentless in his pursuit of inflation, and has said it would be meaningless to ease up on the battle against prices unless the demon has been slain once and for all. Against that, retail inflation is close to RBI's January 2016 target of 6% while growth signals have remained weak, worrying industry and policymakers.

Industrial output in July and August moved up marginally, posting a growth of 0.4%. Core sector output grew at its slowest in eight months in September and resurgent car sales also took a beating in October.

Rajan has kept the benchmark repo rate at 8% after three increases since taking over in September 2013. Jaitley has pitched for a rate cut on the back of stabilising inflation. Crude oil has dropped to a four-year low and other commodities are declining too, which will further rein in prices. Bond markets are already pricing in a rate cut with the benchmark 10-year yield dropping further to 8.19% on Wednesday from 8.26% on Tuesday. Some banks have already cut deposit rates in view of depressed demand for credit.

Mahindra said Rajan had done an amazing job and no one could take away from the fact that the country needed inflation to come under control.

"It's very admirable and sent out very positive signals to the world about our fiscal discipline. But now the need of the hour is we need to kickstart growth... I see signs that the wheels are beginning to move. If we get more deregulation, a dose of reform every day, with some interest rate (reduction), I think by the first quarter of next year, we should see palpable signs of growth," he said.

Others voiced the same sentiment. "My view is RBI should be considering a cut in the repo rates between December and February," said Uday Kotak, executive vice-chairman and managing director, Kotak Mahindra Bank. Bharti Group Chairman Sunil Bharti Mittal also backed the finance minister on a rate cut. The experts also weighed in on their side.



Gita Gopinath, professor of economics at Harvard, said there was room now for RBI to cut interest rates as core inflation had eased. "It's not just that commodity prices have come down, which is a recent phenomenon. Inflationary expectations have moderated. Core inflation has come down. Trajectory is good, the rupee is stable and so certainly (there's) space that I can see for a rate cut in the next round," she said. Some experts have suggested that the governor may wait for the budget in February for a clearer view of the government's finances before deciding on RBI's monetary stance, thus holding rates where they are in December.

Jim Walker, former chief economist of CLSA and founder of Asianomics, was critical of Rajan in a recent interview.

"I worry about the new governor's fixation with inflation accounting. Like his western counterparts he is mixing up consumer prices with true inflation, which is money and credit in the system," Walker said in an interview. "It is time to start cutting rates aggressively." Still, it's not clear how much Rajan will be swayed by opinion. After all, he did ignore the overwhelming support for a rate cut at the last monetary policy meeting of the Technical Advisory Committee.