Fears of recession, may force RBI to cut rate: survey
28 Jan 2008
Mumbai: Despite the Reserve Bank's warnings of inflationary pressures, fears of a global recession and a likely slowdown in domestic production as also the US interest rate cut are expected to weigh high on the central bank's credit policy review due tomorrow, CEOs polled by industry body Assocham say.
Although the RBI has warned of price pressures, domestic inflation was yet to reflect the surging global oil prices that are close to $100 per barrel. As the "pass-through of higher international oil prices to domestic prices remains incomplete,'' the RBI said in its macroeconomic and monetary development review.
The RBI said domestic prices of petrol and diesel have remained unchanged since February 2007, when prices were last cut, even as international crude prices (Indian basket) increased by almost 56 per cent from $56.6 per barrel in February 2007 to $88.2 by the year-end.
The annual rate of inflation has also been well over the Reserve Bank's upper limit of 5 per cent for most part of the current financial year.
However, a majority of the 285 CEOs surveyed by the ASSOCHAM Business Barometer (ABB) said the Indian economy, caught between early but tentative signs of sluggish domestic growth and weakening global demand, would require policy support to retain the current growth level.
- Around 84 per cent of the respondents expected the Reserve Bank to reduce the Repo rate in view of the 75 basis points reduction in the US Federal Reserve rate, the ABB survey which comes a day ahead of RBI's credit policy review found.
- Nearly 90 per cent of the CEOs polled said the continuous policy inaction by the RBI may hurt the confidence of the business community.
- 70 per cent felt that ideally there should be 50 basis point cut in the repo rate,
- 51 per cent supported a minimum 25 basis point reduction.
"The industry expects the central bank to undertake moderation in interest rates under the global as well as domestic compulsions," Assocham president Venugopal Dhoot said.
Most corporate heads are of the opinion that the interest rates in India have reached their peak and are in fact hurting the industrial growth.
The RBI, meanwhile, said it was keeping a close watch on financial markets so that it could respond appropriately to uncertainties in global markets.
Overnight swap rates on the money market edged higher as dealers paid fixed-rate swaps to hedge their bond positions ahead of the policy review.
The five-year swap rate was at 6.56/6.58 per cent in afternoon trade, up from the previous close of 6.53/6.55 per cent.
Paying fixed rate swaps would help investors to offset their bought bond positions as any rise in yields would be offset by the derivatives positions. Yields move inversely to bond prices.
