The Reserve Bank of India (RBI) on Tuesday withstood mounting pressure from industry to cut interest rates and warned of difficult times ahead as a patchy monsoon is threatening to crimp food output, raise prices and pull down overall economic growth.
The RBI kept the repo rate – its key lending rate – unchanged at 8% for the second time in two months, slashed India’s GDP growth forecast to 6.5% from its earlier 7.3% and cautioned that prices would remain high with wholesale inflation expected to touch 7% by end March 2013.
The RBI cut the statutory liquidity ratio (SLR) – or the proportion of money that banks have to invest in gold and government bonds – by one percentage point to 23%.
This will enable banks to unlock funds for lending to consumers.
“The primary focus of monetary policy remains inflation control in order to secure a sustainable growth path over the medium term,” D Subbarao said in the quarterly monetary policy review.
A status quo on interest rates isn’t good news for millions of families caught between rising prices and high borrowing costs.
Surging food costs have shrunk household incomes as consumers have to pay more for the same goods. Such high inflation has meant average middle-income Indians are making expenditure adjustments to keep afloat.
In the last three years, home loan equated monthly installments (EMIs) have only gone up. Home EMIs cannot be compromised, so the budget is squeezed by cutting down on usual monthly expenses and even on items such as clothing and consumer durables. In other words, higher prices and the need to find additional money for EMIs have forced a cutdown on purchases of televisions and cars.
“In the last three years the EMI on my home loan has gone up by 25%. My monthly fuel bills have doubled. So, to ensure that we don’t default on EMIs, we have reduced expenses such as eating out and vacations,” said Sudhir Verma, Delhi-based independent marketing consultant.
“The only viable option left is to sell some ancestral property, earn a lump sum amount, and pay off a bit of my existing home loan,” Verma said.
Rising inflation – wholesale inflation was 7.25% in June – has made the task difficult for Subbarao and his team battling to prescribe policies for an economy nursing multiple wounds inflicted by a politics-induced policy logjam, high prices and a shaky world economy.
At 10.02% India’s retail prices are also high. On a year-on-year basis in June, vegetable prices rose the sharpest at 28%, while milk and allied products shot up 13.2%. Monsoon rains, critical for summer-sown crops, have been 21% deficient so far this year and this could fan prices further.
High borrowing and raw material costs, however, have hit companies that have deferred capacity expansion plans, hurt job prospects and shaved off overall economic growth.
In the first three months of the current year, India’s gross domestic product (GDP) grew 5.3% compared to the same period a year ago, the slowest quarterly pace in a decade, taking the steam out of what was the few “engines of global growth”.
“The RBI has said pause. The RBI has made a right move and the lowering of the SLR is a very important small move (which will) give right indication,” said Kaushik Basu, outgoing chief economic advisor who demitted office on Tuesday to don his academic hat at the University of Cornell.