The Reserve Bank of India, on Friday, attributed the 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 was 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 could not force banks to lend at a lower rate unless they got 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 per cent, seeking to tame inflation. The rate went up by 25 basis points each on September 20 and October 29.
Dr. Chakrabarty said: “Whatever may be the reason for 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 per cent.”
The CPI inflation, measured by movement in the retail prices of food items, soared to a seven-month high of 10.09 per cent in October. WPI-based inflation, too, shot up to 7 per cent in the same month.
Dr. Chakrabarty said since the past 4-5 years the single agenda of the RBI was to contain inflation, and the interest rates would have to be at an elevated level if prices were 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 the 9-10 per cent growth levels.
Potential for 9-10 % growth
“We have the potential for 9-10 per cent (growth trajectory) and we can grow at this rate ... Growth is sacrificed because of high inflation,” Dr. Chakrabarty said.
He said every stakeholder in the economy might have to sacrifice a little to bring back high growth.
He asked industry to focus on efficiency. “You (industry) are only talking about interest which is 7-8 per cent of total cost. But you are not speaking about the remaining cost areas.”
On rising project costs, Dr. Chakrabarty said since the last 4-5 years industry was not bringing in any equity. “Nobody speaks about equity. Do you want to run industry only on debt?” the RBI deputy governor asked.