“Western concept of interest rates having a correlation on spending do not hold water in India”

With the Reserve Bank of India (RBI) leaving key interest rates unchanged for the second consecutive time to fight inflation, trade bodies have expressed apprehension that the move would have a negative impact on the industry, given the bleak economic scenario.

Delivering the first quarter monetary policy review on Tuesday, Reserve Bank Governor D. Subbarao left the repo rate, at which banks borrow from RBI, at 8 per cent, despite demands from the trade and industry to cut interest rates to spur economic growth. The Cash Reserve Ratio (CRR) — the amount of deposits banks keep with the RBI in cash — has also been retained at 4.75 per cent.

Tamil Nadu Small and Tiny Industries Association (TANSTIA) vice-president KR. Gnanasambandan told The Hindu that the western concept of interest rates having a correlation on spending and thereby inflation did not hold water in India. People here would spend based on cultural factors that were independent of the wider economic scenario.

The RBI’s earlier moves to increase rates for nearly 15 times also did not rein in inflation which, he opined, was being driven up primarily by supply-side problems. “The apex bank’s move is a concern for the industries, especially the micro, small and medium enterprises (MSMEs). The companies in countries with low interest rates are flooding the market here with their goods which are cheaper, thus posing a grave threat to the local industrial base.”

To encourage the business community, the rate of interest had to come down to a comfortable level that would ensure that the rate of returns were higher than interest rates. The lack of investment would have a cyclic effect on the larger economy, adversely hit the supply chain, and again contribute to higher inflation, added Mr. Gnanasambandan.

Madurai District Tiny and Small Scale Industries Association (MADITSSIA) president V.S. Manimaran said that the rate of interest must come down given the bleak economic environment both nationally and internationally.

Further, the RBI must also relax the credit norms for the sick units. It must also provide for restructuring of debts of these sick units to motivate small units, which in Tamil Nadu employ the highest number of people.

P. Sitaraman, founder-president and executive committee member of Plastic Manufacturers’ Association of Madurai (PLASMA), said that even the bankers along with the industry expected the rates to come down. The CRR had to come down to 3 per cent if the banks were to start lending freely, and for the small units to access credit at affordable rates.