Thaindian News

New Delhi, Dec 15 (IANS) Since industrial production has dipped into the negative and growth slowed, the Reserve Bank of India (RBI) may not raise key interest rates in its mid-quarter review of the monetary policy Friday amid hopes that the central bank will not play spoil sport this time.

The RBI has hiked rates 13 times since early 2010 to tame inflation. That objective may be achieved by the year-end to some extent. Food inflation has dipped to 4.35 percent for the week ended Dec 3, while headline inflation - though still above 9 percent - has shown some signs of decline.

Finance Minister Pranab Mukherjee acknowledged that interest rates had started affecting investments.

“The struggle against inflation and the tightening interest rate regime has contributed to lowering of growth in demand and investment. The slowdown in industrial growth is of particular concern as it impacts employment,” the finance minister said, but added that inflation was still at “unacceptable” levels.

Industrial production has taken a beating in the past four months. High interest rates have deterred investments and brought down the index of industrial production (IIP) into negative terrain.

IIP for October was logged at (-) 5.1 percent.

Overall gross domestic product growth too will not be as per earlier forecasts. With 6.9 percent GDP growth in the first quarter and 7.3 percent in the April-September period, growth this year will be below expectations.

Latest government estimates peg it at 7.5 percent (+ or - 0.25 percent).

“With growth slowing more than expected and likelihood that headline inflation could cool to 7 percent by March, the central bank is likely to build in a dovish rhetoric in its monetary stance, leaving door open for a possible CRR cut in January and a repo rate cut in first quarter of FY13,” said Abheek Barua, chief economist at HDFC Bank.

The markets were uneasy on Thursday with selling seen in interest rate sensitive stocks such as banking and auto. The 30-scrip sensitive index of the Bombay Stock Exchange which fell over 284 points intra-day pared losses to close on a dull note.

Another major worry for the RBI in the short-term is the sharp depreciation in the rupee. The Indian currency hit another new low Thursday at 54.30 a dollar. It has been consistently falling to new lows for the past four days and has lost over 20 percent to the dollar in just four months.

A falling rupee makes imports costlier, especially those of petroleum products, putting pressure on oil marketing companies to raise prices of de-regulated fuels like petrol. While the government would fend off an increase in diesel, kerosene and cooking gas, it can do so only for a limited time.

All this will add to inflationary pressures again.

“The RBI should reduce interest rates to gradually reverse the impact of the 13 interest rate hikes it has undertaken over the last two years,” said Chandrajit Banerjee, director general of Confederation of Indian Industry (CII).

“RBI should also implement measures to contain the sharp decline in the value of the rupee as this would exacerbate inflationary pressures and take away any gains from the moderation in global commodity prices,” Banerjee added.