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Slash Repo Rate By 100 bps

| 6/14/2012 9:01 PM Thursday

In the previous issue of Dalal Street Investment Journal, I had addressed an open letter to our Honourable Prime Minister, calling his attention to take some bold decisions for the upliftment of our economy, which has deteriorated in condition over the past three years because of lack of reforms. India’s growth rate has come down from 9.5 per cent in March 2007 to 5.3 per cent in March 2012. While our growth rate has come down by a miserable four per cent, our currency has depreciated by a huge 30 per cent, going all the way from Rs 46 to Rs 56 to a dollar. Who is responsiblefor such a situation that our economy is in today? Is there anyone who can be held accountable for all the wrong decisions that are happening in governance?

In my view, our Prime Minister and his team are fully responsible for the bad economic condition that we are in today, as he has no control over the key persons associated with him. His own Chief Economic Advisor, Kaushik Basu, is openly criticising the policies of the government at international forums, stating that there would be no reforms until elections are held in 2014. The RBI, in a bid to contain inflation, kept hiking interest rates, taking the Repo rate from six per cent in 2003 to 9.5 per cent in 2012. This has badly affected the country’s economic growth. The Ministry of Finance is fully responsible for ensuring the growth of the economy. However, it has failed to take any decisions on the reforms front, which could ensure growth. There is apparently no co-ordination among the Finance Minister and the RBI as well as the PMO.

Each one is looking unto himself as the saviour of the country, and is commenting without understanding the impact that their word would have on the market. The Finance Minister, the Chairman of the Planning Commission and our Prime Minister and his office have repeatedly been announcing over the past 18 months that our growth rate would be somewhere between eight to nine per cent. The reality is that it has come down to 5.3 per cent in March 2012. On June 4, Subir Gokarn, Deputy Governor of the RBI, stated that there is room to bring down the rates further because growth is lower than expected and the oil prices are softening. Suddenly, the next day, Dr K C Chakrabarty, Senior Deputy Governor of the RBI, said, “India’s policy rates are not too high to affect corporate growth”. This means that he is of the opinion that our interest rates are not so high as to be affecting growth. Presently, except for Brazil, all the progressive countries of the world have substantially lower interest rates.

What was the necessity for Dr Chakrabarty to make a statement like this when the RBI is seriously considering bringing down the interest rates further? His statement has affected the market sentiment and impacted the Sensex. Why do these top RBI officials have to discuss policy matters in public and create controversies? None of them have a clue on how to control inflation. They do not understand simple economics, and should take lessons from India’s growth story which shows that whenever interest was low, growth was higher. The RBI needs to be bold and decide on slashing the Repo rate by a minimum of 100 basis points and subsequently also reduce it by a further 150 points to bring it to the 2009-10 levels, which were around six per cent. Only this will lift the economy and create a sentiment that will support the expected levels of GDP growth.

Our cover story for the current issue analyses the results for the quarter ended March 2012. As expected and predicted in our previous edit, India Inc. has failed to impress on the financial performance front. This too is also due to the higher interest rate regime, to a large extent. In order to improve the overall economy, our Prime Minister needs to take some strong steps as stated by me in the open letter addressed to him in our previous issue. I expect a few bold decisions to be taken by our Prime Minister after the election of the President of India in July.

 

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