‘No further interest rate hikes required’
3 min read . Updated: 17 Mar 2023, 11:37 PM IST
Premium- Debroy’s comments, drawing attention to an important factor influencing the cost of funds, come against the backdrop of industry representatives asking the Reserve Bank of India to halt interest rate hikes
Inflation concerns do not warrant any additional interest rate increases, Bibek Debroy, chairperson of the Economic Advisory Council to the Prime Minister (EAC-PM), said, adding that businesses are contending with high interest rates due to the inefficiencies of the banking sector, resulting in a wide gap between borrowing and deposit rates.
Debroy’s comments, drawing attention to an important factor influencing the cost of funds, come against the backdrop of industry representatives asking the Reserve Bank of India to halt interest rate hikes due to mounting costs.
He said it is for the monetary policy committee (MPC) and the RBI to decide on the policy rates, but he felt that inflation is no longer a valid worry to push up interest rates further.
“I personally think that inflation is not as much of a worry as to suggest an increase in interest rates any more. Is it possible to reduce interest rates? Given what is happening globally, given the uncertainty, given the fact that a lot of reactions are dependent on what the US is doing, we don’t know about crude prices; so therefore, we don’t know what will happen to imported inflation, all of that. I think it would be premature to expect any interest rate cuts," Debroy said.
“One question is what the RBI should be doing about interest rates. That, of course, the RBI knows, and the MPC has a lot of expertise...This is something that MPC will decide, and we are also talking about growth. If I’m confident about 7% real growth, I will react to the interest rates in one particular way. If I think it’s not going to be 7% but is going to be 6%, I will react to interest rates in a slightly different way. RBI’s own projections don’t suggest 7%. They don’t suggest 6% either, but they don’t suggest 7%," Debroy said.
RBI has projected a 6.8% growth for FY23 and a 6.4% growth for FY24.
Debroy also flagged a key factor that impacts the borrowing costs for businesses, saying that lending rates in India are too high. The spread between the deposit rate and the lending rate is too high, reflecting the inefficiency in the banking sector, Debroy said.
Debroy said that the twin-balance sheet problem that constrained private investment has now been fully addressed and that empowerment of the rural population by welfare schemes of the government is supporting rural consumption.
“My sense would be that the twin balance sheet problem has gone away now. Non-performing assets are not what they used to be. I think banks are willing to lend again. I don’t think there is sufficient demand for credit still, and maybe it has something to do with investments being postponed or whatever. It may have something to do with the fact that investments are financed in ways other than credit also," he said.
Debroy rejected the argument that rural consumption is weak. “There is always some element of seasonality, and monthly figures go up and down. So every time a monthly figure says this has gone up or that has gone down, it immediately makes the headlines. So I think one should be concerned about the trends. As trends go, since May 2014—and it continued with the second term of the Narendra Modi government—a lot has been done in the form of addressing the basic necessities for the poor, and it has shown very clearly in terms of improvements in the rural sector."
Debroy cited various surveys and the UNDP’s Multidimensional Poverty Index and said that the story essentially is that there has been empowerment in rural areas, whether it is in the form of access to tap water, sanitation, toilets, housing, electricity or cooking gas.
“Any such empowerment will lead to economic activity," he said. “Every industry person you speak to will say migrant labour that went back is not coming back. If they are not coming back, the rural sector cannot be in bad shape."
Debroy also said that the government is embarking on capital spending in a big way. “A lot of the action depends on the states. Now, it is perfectly possible that both consumption and private investments react to uncertainty. And some of this uncertainty from the economy’s point of view is global uncertainty. And we know it’s continuing...Because global uncertainties are outside the government’s control, the best thing the government can do is to impart certainty to domestic policies, which the government has done."
