Banks should pass on rate-cut benefits to spur investment, says India Inc

The Reserve Bank of India on Wednesday decided to reduce the repo rate by 35 bps to 5.40 per cent

With the Reserve Bank of India (RBI) slashing the benchmark repo rate for a fourth straight time, India Inc on Wednesday said it was time banks passed on the benefits of rate cuts to end-customers, so as to encourage consumer spending and spur investment by companies.

The central bank has lowered the key policy rate by a cumulative 110 basis points (bps) in the current easing cycle — bringing the rates to a nine-year low. Meanwhile, banks have cut rates by only 29 bps.

“The RBI's step was absolutely necessary for reducing cost of capital more in line with inflation expectations. This will certainly motivate the supply side and drive consumption. But what is important is that the banks must transmit the rates and start taking risks. India Inc will certainly step up investments if they get good rates and return on risk capital," said Sanjay Nayar, CEO of KKR India.

Others concur. “With the current slowdown and challenging global environment, there are multiple vectors that need to come into play for the economy to reach its previous growth rates and a rate cut is one of them,” said Rashesh Shah, chairman & CEO, Edelweiss.

While rural India has seen some slowdown of late, the initiatives for priority sector lending are encouraging. “However, based on how the global and domestic economy pans out, we might need even more forceful measures, including further rate cuts,” added Shah.

Mahindra & Mahindra’s Group CFO V S Parthasarathy said the RBI has given clear commitment to keep the banking system flush with liquidity. “This should enable monetary transmission, thereby making this rate cut a cut above the rest,” said Parthasarathy.

CEOs have complained that high interest rates have blocked their investment decisions. At the same time, customers are also deferring their purchases for new consumer durables, cars, and homes.

The RBI confirmed on Wednesday that tractor and motorcycle sales — indicators of rural demand — continued to contract, while passenger vehicle sales declined for the eighth consecutive month in June. However, the RBI said domestic air passenger traffic growth turned positive in June after three consecutive months of contraction.

Commercial vehicle sales slowed even after adjusting for base effect. Construction activity indicators slackened, with contraction in cement production and slower growth in finished steel consumption in June. Import of capital goods — a key indicator of investment activity — also contracted in June.

The overall industrial growth, measured by the index of industrial production, moderated in May 2019, pulled down by manufacturing and mining, even as electricity generation picked up on strong demand. But the production of capital goods and consumer durables decelerated.

Growth rate for the index of eight core industries decelerated in June, dragged down by a contraction in petroleum refinery products, crude oil, natural gas, and cement.

CEOs said they buoy hopes ahead of the festive season. “The slowdown being experienced right now is driven majorly by cyclical and sentimental factors and the Indian economy is structurally robust and is on its course to reach $5 trillion in the next five years with stable government at the Centre,” said Seshagiri Rao, CEO, JSW Steel.

“I think this is a positive move that will improve consumer demand for new homes,” said Pirojsha Godrej, chairman, Godrej Properties.

With inputs from Raghavendra Kamath