A Good Time to Reduce the Repo Rate: PHD Chamber

We appreciate the efforts of the Government to tackle the inflationary scenario which has come down significantly from 6.1% in July 2016 to the level of 1.5% in June 2017. WPI inflation has also decelerated from 3.3% in January 2017 to 0.9% in June 2017, said Mr. Gopal Jiwarajka, President, PHD Chamber of Commerce and Industry.

However, despite the significant deceleration in inflation rate, the repo rate is still high and growth of industry and manufacturing sector is in the lackluster trajectory, said Mr. Jiwarajka.

Growth in industry output, as measured in terms of IIP, for the month of May 2017 grew only at 1.7% of which the growth of manufacturing sector stands at 1.2% in the same period, he added.

The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) fell to a four month low of 50.9 in June 2017 from 51.6 in May 2017, signalling a subdued improvement in the manufacturing sector.

So, at this juncture rate cut becomes inevitable to support the industrial growth and to enhance the competitiveness of the manufacturing sector, said Mr. Jiwarajka. 

Now, almost all the factors are favourable such as good monsoon behavior, inflation is under control and GST is implemented, he said.

Considering the good monsoon behavior supported by reforms in the supply side, we believe the inflation should not be more than 4% in the current financial year 2017-18, said Mr. Jiwarajka.

It is inspiring to know that India’s inflation rate is lower as compared to various advanced and emerging economies such as United States of America (USA), Germany, South Africa, Brazil and Russia, he said.

However, interest rates in India are much higher than USA, Germany, China and Singapore, he said.

It has been observed that USA have lower inflation rate (1.6%), but at the policy front, interest rates in the country is also low at 1.25%. Similarly in the case of China and Singapore, the inflation and interest rates are in the lower trajectory.

RBI reduced repo rate by 25 basis points in October 2016, however, industry was expecting a rate cut at so many junctures. Firstly, at the time of demonetization, secondly at the time of fiscal consolidation measures announced during Union Budget 2017-18 and thirdly at the time of good monsoon in July 2017, said Mr. Jiwarajka.

Going ahead, we expect atleast 25 basis points cut in repo rate from 6.25% to 6.0% in the forthcoming third bi-monthly Monetary Policy 2017-18 due on August 02, 2017 and further, 25 basis points cut in repo rate by December 2017.