No further rate hikes necessary
New Delhi: Inflation concerns do not warrant additional rate hikes, said Bibek Debroy, chairman of the Prime Minister’s Economic Advisory Council (EAC-PM), adding that businesses are facing high interest rates due to the inefficiency of the banking sector, resulting in a large gap between interest rates on loans and deposits.
Debroy’s comments, which draw attention to a key factor affecting the cost of funds, come amid industry representatives asking the Reserve Bank of India to halt rate hikes over rising costs.
He said it is up to the Monetary Policy Committee (MPC) and the RBI to decide on policy rates, but he felt inflation is no longer a legitimate concern to push interest rates further.
“Personally, I think inflation is not so much a concern anymore as suggesting an increase in interest rates. Is it possible to lower interest rates? Given what’s happening globally, given the uncertainty, given that a lot of the responses depend on what the US does, we don’t know anything about crude prices; so that’s why we don’t know what will happen with imported inflation, all that. I think it is premature to expect interest rate cuts,” said Debroy.
“One question is what the RBI should do about interest rates. Of course, the RBI knows that, and the MPC has a lot of expertise… This is something that MPC will decide, and we’re also talking about growth. If I’m confident of 7% real growth, I’ll react to interest rates in a certain way. If I think it won’t be 7% but 6%, then I’ll respond to interest rates a little differently. RBI’s own projections don’t suggest 7%. They don’t suggest 6% either, but they don’t suggest 7% either,” Debroy said.
RBI has forecast growth of 6.8% for FY23 and growth of 6.4% for FY24.
Debroy also identified a key factor influencing corporate borrowing costs, which is that borrowing rates in India are too high. The spread between deposit rates and borrowing rates is too high, reflecting inefficiency in the banking sector, Debroy said.
Debroy said the double balance problem that limited private investment has now been fully addressed and that empowerment of the rural population through government welfare schemes supports rural consumption.
“My feeling would be that the double balance problem is gone now. Non-performing assets are no longer what they used to be. I think banks are willing to lend money again. I don’t think there’s enough demand for credit yet, and maybe it has something to do with delaying investments or whatever. It may have something to do with the fact that investments are also financed in ways other than credit,” he said.
Debroy rejected the argument that rural consumption is weak. “There is always an element of seasonality and monthly numbers go up and down. So every time a monthly figure says this is up or that is down, it immediately makes headlines. So I think one should be concerned about the trends. As trends develop, much has been done since May 2014 – and that continued with the second term of the Narendra Modi government – in terms of addressing the basic needs of the poor, and it has been very clear in terms of of improvements in the rural sector.”
Citing several studies and the UNDP’s Multidimensional Poverty Index, Debroy said the story is essentially that there has been empowerment in rural areas, be it access to tap water, sanitation, toilets, housing, electricity or cooking gas.
“Empowerment of any kind will lead to economic activity,” he said. “Any industry person you speak to will say that migrant workers who went back aren’t coming back. If they don’t come back, the rural sector can’t be in a bad way.”
Debroy also said the government is starting capital spending on a large scale. “A lot of the action depends on the states. Now it is perfectly possible that both consumption and private investment respond to uncertainty. And part of this uncertainty from an economics standpoint is global uncertainty. And we know it will continue…Because global uncertainties are beyond the government’s control, the best the government can do is to give certainty to domestic policies, which the government has done.”