With inflation plunging to a historic low of (-)4.95 per cent in August, India Inc today said the Reserve Bank must cut the benchmark rate to lower cost of finance and revive consumer demand, which is crucial for supplementing economic growth.
“Given that CPI inflation has also been declining, RBI needs to reduce interest rates sharply to drive a recovery in demand,” CII Director General Chandrajit Banerjee said. “CII expects RBI to reduce interest rates by 50 basis points in the forthcoming policy with statements supporting further easing in the near future.”
The deflationary trend continued for the 10th month in a row, with inflation plunging to a historic low of (-)4.95 per cent in August on cheaper fuel and vegetables, putting pressure on RBI to cut interest rate.
“Under the present circumstances, it would be most appropriate for RBI to give weight to growth considerations and announce a deeper cut in the policy rate. We hope RBI and the banking community will coherently work towards lowering of lending rates,” FICCI President Jyotsna Suri said.
The wholesale price index-based inflation was (-)4.05 per cent in July. It has been in the negative zone since November 2014. In August 2014, inflation was 3.85 per cent.
“RBI must ensure that cost of finance to the end-user becomes competitive as it would also aid in increased purchasing power of consumers and demand for goods will increase,” Assocham President Rana Kapoor said.
“This would surely help build growth momentum. Therefore, RBI in its upcoming policy must give due consideration to providing further fillip to demand in the economy and announce a rate cut.”
However, the industry also expressed concern about deflation, saying it could lead to demand slowdown in the economy.
“Deflation is a far greater worry than inflation, considering that some fall in prices could very well result in slowing down of demand in the economy... when prices start falling, a vicious cycle of lower spending and lower demand sets in, thereby hampering growth,” said Kapoor.
The Reserve Bank mostly tracks the consumer price index- based inflation for its policy decision, and its next review is due on September 29.
Devendra Kumar Pant, Chief Economist, India Ratings & Research, said the “chances of a 25 bps cut in repo rate on September 29, 2015 have brightened”.