PM says inflation at unacceptably high level

Manmohan Singh says it should be around 5-6% bankers plead for rate cut in RBI policy review on December 18

Ahead of the Reserve Bank of India’s (RBI’s) monetary policy review next week, Prime Minister Manmohan Singh on Saturday said inflation has risen to “unacceptably” high levels in the past two years, and it needs to be brought down to five-six per cent from over 7.24 per cent in November. However, bankers, including the largest lender State Bank of India (SBI), made a case for a cut in the repo rate.

Chief economic adviser Raghuram Rajan said inflation is expected to soften from January. He did not specify when should the RBI start cutting rates, but said if inflation was controlled, interest rates might turn benign and industry concerns over high interest rates should be taken into account.

“Inflation rates in the last two years have increased to unacceptably high levels and need to be brought down to no more than five to six per cent,” the Prime Minister said at the annual general meeting of the Federation of Indian Chambers of Commerce and Industry (Ficci).

Inflation came down to a 10-month low of 7.24 per cent in November against 7.45 per cent in October, fuelling hopes of a rate cut by the RBI in its monetary review on December 18. Economists, however, did not expect the RBI to cut the repo rate.

Bankers wanted the RBI to cut the rate.

SBI Managing Director Diwakar Gupta told reporters on the sidelines of Delhi Economic Conclave, organised by the finance ministry, that the RBI should consider cutting both repo rate and the cash reserve ratio (CRR). “As a banker, I can always say that our wish-list is that rate should change, they should reduce. Both repo and CRR,” he said.

He said the RBI had already reduced the CRR fairly, though some more cut would be good. “CRR has already been brought down significantly by the RBI, if they do a little more that will be great. Repo cut will actually bring down rate systematically in the system. So, deposits will be cheaper and therefore people will lend cheaper. Overall there will be a downward bias which has been required,” he said.

At the same event, Indian Overseas Bank Chairman M Narendra told reporters reduction of 25 basis points in the repo rate was expected in the upcoming monetary policy review as inflation had come down.

He said the central bank might also cut CRR by 25 basis points, as short-term liquidity is tight due to advance tax payments.

The core inflation (manufactured products sans food items), which many consider a key part of the rate of price rise for the RBI to take a call on the policy rate, plunged to a 32-month low at 4.49 per cent in November versus 5.19 per cent in the previous month.

Rajan told reporters on the sidelines of the FICCI AGM the very fact that core inflation came down quite strongly in the latest number is a reason for confidence. He said the RBI has been saying that because of base effect it expected the inflation would be lower in the early part of next year. “So, January-February (inflation should ease). There may be a blip now, but as we go to the next year, some easing of inflation can be expected,” he said.

When asked whether the drop in inflation in November makes a case for the RBI to cut the repo rate, he evaded a direct reply, saying, “that is an RBI decision.”

However, taking a question from the floor at the FICCI event, he said interest rates may soften as inflation comes down. “Hopefully, with the RBI working on bringing down inflation, things will start looking up in terms of interest rates.”

He agreed with the questioner that interest rates in India are high. “But, they are high because nominal interest rates are high. We have high inflation. In, real terms they are not so high, but still the concerns that industry is borrowing at high nominal interest rates has to be taken into account,” he added.

In its October review, the RBI had cut the CRR by 25 basis points to 4.25 per cent, injecting around Rs 17,500 crore of liquidity into the banking system. However, it had retained the repo rate at eight per cent.

On the beleaguered Kingfisher Airlines, the SBI managing director said there was no need to panic as long as there are assurances from the airline. “Kingfisher has been a good airline at some point of time. They are going through their set of problems. And there is no reason for bankers to panic as long as they say that they are looking for a solution. The assurance only is that they are trying,” he said. SBI is the lead banker in the 17-lenders consortium that extended Rs 7,000 crore loans to the now grounded Kingfisher Airlines.

The lender has an exposure of Rs 1,500 crore to Kingfisher Airlines, which has not been serviced since January 2012. It has not reported any profit since its inception in 2005. It has a debt of over Rs 7,000 crore.

Gupta said the bank’s high non-performing assets (NPAs) are ‘temporary’. “NPAs continue to be a challenge. But I don't want to put a number to it. I can only tell you that a large part of the NPAs is because of the external economy and I would think they are temporary,” he said.

SBI’s NPAs rose to 5.15 per cent in the second quarter ended September, from 4.19 per cent over the year-ago period because of deteriorating asset quality.

He said the bank had made adequate provisioning norms.

“We have been providing in excess of the prudential provisions. Whatever the RBI asked us to provide, we have been providing that, plus a little more.” Gupta said.