Biting the interest rate cut bullet

Monetary policy review: India has dubious distinction of being country that witnessed max rate hikes.

Today,when Reserve Bank of India RBI Governor D Subbarao unveils the mid-quarter review of the monetary policy,India has the dubious distinction of being the country that witnessed maximum rate hikes across leading developing and developed nations in the last three years. It was also the period when bank non-performing assets NPAs surged and home loan borrowers realised the harsh reality of repayment liability being passed on to their next generation.

Since August 2009,the repo rate has increased by a record 325 basis points bps to 8 per cent. When compared to others in the BRICS league,this is quite high. Russia saw a 250 bps decline in its key Refinancing Rate to 8.25 per cent during the same period. Brazil cut Selic Rate five times in the last one year to 7.5 per cent. Chinas Benchmark 1-year Lending Rate has fallen 56 bps to 6.00 per cent this year and South Africa cut repo rate by 200 bps to 5.00 per cent since 2009 with the last 50 bps cut coming in July this year. Euro area Main Refinance Rate is just 0.75 per cent and its inflation is 2.6 per cent despite all its woes.

The RBIs argument so far has been that India has high inflation with the consumer price index rise now at 9.7 per cent,whereas Brazil,Russia,China and South Africa reported inflation of 5.2 per cent,5.59 per cent,2 per cent and 5 per cent respectively. Each country may have its own set of problems. In India,it could be in the area of government finances or supply-side issues. The RBI has now got a good opportunity to catch up and push for lower rates with the government hiking diesel prices and opening up the aviation and retail sectors.

This is also a golden chance to bring down the NPAs of Rs 1,37,000 crore,another legacy of the high interest rate regime that led to the fall in the growth rate. Together with restructured loans of Rs 218,000,money stuck works out to a whopping Rs 3,55,000 crore. Remember,this figure was only Rs 148,000 crore in 2009. Experts say that this high level of sub-standard loans can add to the high interest rates.

Subbaraos favourite argument to silence the RBIs critics of the monetary policy is: inflation hurts the poor. We have to listen to the voice of the poor too. Some sacrifice of growth is an unavoidable price to pay. But sacrifice is only in the short-term. The RBIs short-term sacrifice is now almost three years old. While rich corporates are now going for loan recasts and even defaulting,small borrowers,especially home loan customers,have no option but pay through the nose for the fear of losing their homes. Will Subbarao bite the rate cut bullet today?

george.mathewexpressindia.com