Expectations are running high among India Inc from the Reserve Bank of India to be more accommodative and cut benchmark interest rate between 25-50 basis points when it reviews the Repo on September 29, in the wake of continued deflation on WPI for the tenth month in a row, an industry mood assessment by ASSOCHAM has noted.
The inflation based on the Consumer Price Index (CPI) was also at a record low of 3.66 per cent in August- over two percentage points lower than the RBI's January 2016 target.
"At the same time, the growth in several interest sensitive sectors like real estate, construction, automobile, consumer durables and non-durables has been sub-optimal, crying for a build up of a market demand," the chamber survey report said.
Continuing its deflationary trend, which shows how the pricing power with the manufacturers has been curtailed, the WPI inflation plunged to a historic low minus 4.95 per cent in August, though helped by the cheaper global commodity rates.
With the exception of pulses, onion and a few vegetables prices of other food items have remained benign, reflecting squeezing of the consumer demand that in turn discourages investment in various sectors of the economy.
"Cut in interest rates is required to act as a demand push at the consumer level while at the same time, to help revive investment cycle, particularly in the private sector.
The trouble has been aggravated by a high level of debt in the private sector which makes it onerous for the companies to service the debt. Rather than a small cut, at least a 50 bps reduction in Repo with a clear message to the banks to pass on the same, should be pushed," ASSOCHAM Secretary General Mr D S Rawat said.
Industrial production decreased 0.4 percent in August after increasing 0.9 per cent in July. "Thus there is a strong case for a rate cut," the chamber said.
It said the RBI has been rather conservative and remained too much focused on inflation while growth in the industrial production, infrastructure and services is required for a real push to economy.
"The other area, which is highly job oriented is the merchandise export sector which remains in a shambles. The exporters must also be supported by a lower interest rate regime. As it is, the ASSOCHAM does not expect the exports to go beyond USD 268 billion in the current fiscal as against USD 310 billion.