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Industry pleads for cheaper credit

“The entire industry was in one mind that the interest rates are hurting the economy. If the rates continue to remain high, there is a fear that the economic growth will stall or there could be some contraction as well,” builder Niranjan Hiranandani told PTI after meeting RBI deputy governors

Mumbai: Leaders of industry on Monday appealed to the Reserve Bank of India (RBI) to cut interest rates in the forthcoming credit policy saying the economy could slide into difficulties if credit is not made cheaper, reports PTI.

“The entire industry was in one mind that the interest rates are hurting the economy. If the rates continue to remain high, there is a fear that the economic growth will stall or there could be some contraction as well,” builder Niranjan Hiranandani told PTI after meeting RBI deputy governors here.

The monetary authority will unveil its second quarter credit policy on 25th October.

Mr Hiranandani, managing director of the Hiranandani Group, said recent data like the drastic fall in factory output numbers suggested that the Index of Industrial Production (IIP) numbers too would fall if the interest rates continue to be high.

“There is an urgent need to reduce the rates and all the industry bodies like Ficci, CII and IMC are united in that,” Mr Hiranandani, who was a part of a Ficci delegation, said.

Ratings agencies and many brokerages have cut their economic growth forecasts to around 7.5% in FY11-12 and cite the repeated rate hikes as one of the factors denting growth prospectus.

In its quest to tame inflation, the RBI has hiked its key rates a record 12 times in the last 19 months, ending up making credit dearer which has in turn affected investment activity.

Core inflation, which was at 9.78% for August, continues to be high and all eyes are now set on what stance the central bank will take at the 25th October monetary policy review.

As part of the policymaking process, RBI meets different interests groups and it heard industry bodies yesterday.

Godrej Group chairman Adi Godrej, ratings agency Crisil’s managing director and chief executive Roopa Kudva, Federation of Indian Exporters Association’s Ramu Deora were also present, Mr Hiranandani said.

The Fieo president urged the RBI to ensure that PCFC or Pre-shipment credit in foreign currency is made available to exporters, besides making EEFC or exchange earners’ foreign currency accounts interest bearing as well as exempting companies from credit rating requirements.

Mr Deora said, given the requirement of dollar loans by exporters and limited availability of the same, RBI may set up a corpus of funds commensurate with the requirements of the MSME export sector. He further said PCFC be given at least up to 50 percent of the dollar earned by them in the previous month.

“Those who earned dollars should get dollars for their export production to import inputs,” Mr Deora said, and argued that making EEFC account interest bearing can offset the increasing cost of credit which in turn will help exporters minimise losses due to the currency volatility.

On credit rating, Mr Deora said it should not be made mandatory for SMEs as it is costly as well as time consuming.

Mr Deora said the government should go for bold reforms in exports as otherwise it would be difficult to arrest the widening trade deficit which may touch $115 billion in the current fiscal as exports are expected to be below the target and may reach only $275-$280 billion this fiscal.

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Inflation below 5.5% can boost growth: RBI study

“Empirical results... show that there exists statistically significant structural break in the relation between growth and inflation at 4.5%-5.5%... Thus substantial gains can be achieved if inflation is kept below the threshold,” the RBI’s working paper said

Mumbai: Inflation of less than 5.5% can give a fillip to economic growth, reports PTI quoting a study by the Reserve Bank of India (RBI).

“Empirical results... show that there exists statistically significant structural break in the relation between growth and inflation at 4.5%-5.5%... Thus substantial gains can be achieved if inflation is kept below the threshold,” the RBI’s working paper said.

The paper, authored by RBI executive director Deepak Mohanty and three other officials found there is a positive impact on growth when inflation is up to 5.5%.

“The relationship reverses when Wholesale Price Index (WPI) inflation is beyond 5.5% and inflation effect on growth turns negative...,: said the working paper ‘Inflation Threshold in India: An Empirical Investigation’.

The paper comes at a time when the RBI is under pressure due to the sustained inflationary pressure in the economy.

Headline inflation stood at a 13-month high of 9.78% in August. RBI has hiked its key policy rates 12 times since March 2010 to tame demand and curb inflation.

Experts have said the repeated rate hikes, which have led to an increase in cost of borrowings, a decline in fresh investments and slowdown in the economy.

Economic growth in April-June slowed to 7.7%, the slowest in six quarters. RBI has already revised downwards its growth forecast for the country to 8% in 2011-12, from 8.5% gross domestic product (GDP) growth in the previous fiscal, and said inflation would act as a dampener.

In the paper, the authors tried to find out if inflation in India has to reach some minimum ‘threshold’ before growth effects turn adverse.

“The findings clearly suggest that inflation threshold in the sense of structural break point exists for India and this implies a non-linear relationship between inflation and growth,” it said.

According to the study, the growth-inflation relationship depends on the rate of price rise.

“... at some low levels, inflation may be positively correlated with growth, but at higher levels inflation is likely to be harmful to growth. In other words, relationship between inflation and output growth is non-linear,” it said.

The paper also argues that the concepts of inflation target and inflation threshold are distinct.

“Inflation targeting is a construct of monetary policy making in which a central bank announces a ‘target’ and then steers its policy tools towards achieving that target.

Inflation threshold is a point of inflexion for the growth-inflation trade-off,” it said.

According to the RBI paper, inflation threshold need not necessarily be the ‘target’ of monetary policy.

“The inflation objective or the target level of inflation for monetary policy should be lower than the inflation threshold, considering the existence of significant lags in the transmission of monetary policy measures and the costs of inflation,” the paper said.

From 1996 to 2002, the country’s GDP growth stood at around 6%, while the year-on-year average Wholesale Price Index-based inflation was close to 5%.

Subsequently, growth went up even as inflation remained relatively low in the range 5%-6% “till global financial crisis adversely affected growth-inflation dynamics”.

“After the recent global crisis in 2008, growth rate of India bounced back much quicker than anticipated and at the same time inflation went up significantly. Therefore, the dynamics of growth-inflation nexus in India is not straight forward.

“For a country like India, which has witnessed many structural changes in the past few decades, going back too long may not reflect the current evolving state of the economy,” the paper, which studied the economic growth and inflation data between 1996-97 and 2010-11, said.

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