Recessionary fears in the global economy, slowdown in domestic industrial production in November 2007 and the widening gap between the US and Indian interest rates have set the stage for a policy rate cut by the RBI tomorrow, an Assocham CEO survey has said.
Majority of the 285 CEOs surveyed by the Assocham Business Barometer felt that the Indian economy caught between early but tentative signs of sluggish domestic growth and weakening global demand would require policy support to retain the growth achieved consistently for the past three years. As many as 84 per cent of the respondents of ABB done prior to the RBI policy review hoped for a cut in the repo rate by the Reserve Bank in view of the 75 basis points reduction in the Federal Reserve Rate.
The corporate heads felt that the interest rates have reached their peak and are in fact hurting the industrial growth. Around 90 per cent of them said the continuous policy inaction of the regulator may hurt the confidence of the business community. While 70 per cent of the respondents felt that ideally there should be 50 basis points cut in the repo rate along, 51 per cent said the reduction could be only 25 basis points. "The industry expects the central bank to undertake moderation in interest rates under the global as well as domestic compulsions," Assocham President Venugopal Dhoot said.
In view of the bleak outlook for the US economy, currently undergoing slump in housing market, strained financial markets, rising unemployment rate, softening in overall economic activity, the Federal Reserve has reduced its interest rate by 75 basis points. "A possibility of further reduction is not ruled out," Assocham said.
Further slashing in Fed rate would create the situation of "arbitrage opportunities" for the global investors wanting to shift their funds from the low yield US and other developed markets, to high-return Indian market "This would lead to surge in the capital inflows and aggravation of the problem of rupee appreciation," it said.
The RBI has been following the tight monetary policy to avoid the inflationary pressures built up with around 9 per cent growth in the economy and major supply constraints. The CEOs poll cited rise in global food and oil prices as the major impediment to a move by the central bank for a rate cut.
The rise in borrowing cost coupled with rise in exchange rates in favour of rupee has led to slowing down in the export-oriented manufacturing and construction which have a bearing on employment, the chamber said.
It said, while the overall growth rate of manufacturing has come down to 9.8 per cent for the period April-November 2007 as compared to 11.8 per cent a year ago, the consumer durables sectors have recorded a decline of 1.7 per cent for the eight month period against of 12.4 per cent. 92 per cent of the respondents believed that there is no absolute "de-coupling" of Indian economy with that of the US. "RBI Governor has given an indication that the monetary policy will take into consideration the global situation," Assocham said.