RBI blames inflation for high interest rates

Business

oi-Staff

By Super

Published: Saturday, November 16, 2013, 9:32 [IST]

Kolkata: The RBI on Friday attributed high interest regime to inflation and said banks in such a scenario would not be able to pass on lower rates even if the policy rate is brought down.

"Even if we reduce the policy rate, the banks would not, as they would not be able to mobilise money from depositors at a particular price," RBI Deputy Governor K C Chakrabarty told MCC Chamber of Commerce and Industry. He said the RBI cannot force banks to lend at a lower rate unless they get funds at lower cost.

Since taking over at RBI on September 4, Governor Raghuram Rajan has twice hiked the repo rate - at which the central bank lends to banks - to 7.75 percent, seeking to tame inflation. The rate went up by 25 basis points each on September 20 and October 29.

Chakrabarty said: "Whatever may be the reason for the inflation, people will not deposit their money at a rate below the inflation figure. Then how will banks mobilise cheap funds or pass it. Even at the current rate, bank deposits growth is not exceeding 12 percent."

The CPI inflation, measured by movement in the retail prices of food items, soared to a seven-month high of 10.09 percent in October. WPI-based inflation, too, shot up to 8-month high of 7 percent in the same month.

Chakrabarty said since the past 4-5 years the single agenda of RBI was to contain inflation and interest rates will have to be at an elevated level if prices are high and stubborn. "Inflation has to be controlled by monetary policy," he said.

The deputy governor said despite the country striving to contain the inflation and high rate regime, the central bank hoped that it could go back to 9-10 percent growth levels.

"We have the potential for 9-10 percent (growth trajectory) and we can grow at this rate ... Growth is sacrificed because of high inflation," Chakrabarty said.

He said every stakeholder in the economy may have to sacrifice a little to bring back high growth. GDP growth had slowed to 5 percent in FY'13. The situation was, however, improving with exports up and the pressure of CAD easing, Chakrabarty said and hoped for an improvement in the pace of economic growth post elections. He asked the industry to focus on efficiency.

"You (industry) are only talking about interest which is 7-8 percent of total cost. But you are not speaking about the remaining cost areas." On rising project costs, Chakrabarty said since the last 4-5 years industry is not bringing in any equity. "Nobody speaks about equity. Do you want to run the industry only on debt?" the RBI deputy governor asked.

PTI