Now, Bankers Seek Pro-industry Steps

India's top bankers urged the Reserve Bank of India to ease monetary policy to boost liquidity and revive economic growth on 9 July, but C. Rangarajan, Chairman of the Prime Ministers' Economic Advisory Council said that RBI may cut rates only if manufacturing inflation eases.

"I believe, if the inflation rate, particularly non-food manufacturing, shows a decline, then there will be scope for the RBI to adopt an easier stance," Rangarajan told reporters on the sidelines of a National Housing Bank event in New Delhi.

Rangarajan pointed out: "In other countries, growth rate is low but at the same time inflation is also low. Whereas in our country, while growth is slowing inflation remains at the high level".

The central bank is facing increasing pressure from industry to loosen its policy. But it is unable to do so because high inflation continues to pose a serious threat to India's growth prospects.

However, rate-cut proponents argue that manufacturing inflation, a key measure of core inflationary pressures, has eased considerably. This, they say, allows the RBI the room it needs to shift its attention toward arresting a worrying slowdown in the economy.

"Though liquidity is comfortable as of now, we have sought some money supply measures and a pro-industry stance at the forthcoming monetary policy announcement considering the poor show by the economy in the recent months," Bank of India CMD Alok Kumar Misra, who is also the chairman of the Indian Banks Association (IBA), told reporters after the customary pre-policy meeting with the RBI.

"It could be a cut in the cash reserve ratio (CRR) or in the short-term lending rate (repo rate). Even China has cut its repo rates twice in one month," Misra said.  However, he parried a question on whether the RBI is in a mood to listen to the demand for a rate cut.

Misra said RBI has expressed concerns about the slow deposit and credit growth rates.

However, HDFC Bank MD and CEO Aditya Puri said that given high inflation (at 7.6 per cent in May), he does not see any rate cuts on July 31.

"A rate cut is not a panacea for all the pains of the economy. At the current inflation rate, I don't see any room for the central bank to cut interest rate. While the RBI can do something to ease money supply,  the government should do everything to ease supply-side bottlenecks," Puri said.

SBI MD and CFO Diwakar Gupta said the bankers presented "their wish-list to the deputy governors", but did not elaborate.

However, Gupta and Misra said they discussed the rising stress levels in the system due to the increasing bad loans, but again they refused to divulge details on which are the sectors under stress.

The demands stem from growing worries over an economic downturn in Asia's third-largest economy, which expanded just 5.3 per cent in the January-March quarter, the weakest pace in nine years. Tight liquidity has further crimped lending to industry, adding to growth worries. In fact, the latest survey by Standard Chartered Bank said India's GDP growth will likely be less than 6 per cent for FY1 (Read: StanChart Survey ).

Treading the anti-inflationary path beginning March 2010 through October 2011, RBI Governor D Subbarao  had increased the lending rates by a record 13 times or 350 basis points.  However, with the growth declining, he had in the January policy sounded pro-growth and had in two doses cut CRR by 125 bps and lending rate by a more than expected 50 bps in April.

But since then the growth curve has been on a southward direction, and inflation high, hence, forcing RBI to keep the rates unchanged at the June 16 mid-quarter review.

Headline inflation was high at 7.55 per cent in May, even though non-food manufacturing inflation has eased in recent months, slipping below 5 per cent in May.

While the RBI side comprised deputy governors Subir Gokarn, in-charge of the monetary policy department,  K C Chakrabarty, K R Khan and Anand Sinha, the bankers side included the SBI's Gupta, ICICI Bank MD and  CEO Chanda Kochhar, HDFC Bank's Puri, Union Bank CMD D Sarkar and Allahabad Bank CMD J P Dua, among  others.

Union Bank's Sarkar, had over the weekend told reporters that he was expecting a 0.50 per cent cut in CRR.

"My policy expectation is that the CRR should be reduced.

It will help us as the liquidity will go up and possibly, also help us reduce our lending rates. CRR should be cut by a minimum of 50 bps," Sarkar had said.

(With agencies)