& #39;Rate Cut Must To Spur Credit & #39;

Large cuts in lending rates will be required to boost credit offtake, which ebbed to its lowest level in last five years on the back of industrial slowdown, said ICICI Securities and Finance (I-Sec) in its latest debt markets update.

Industrial production, which recorded only a 2.7 per cent year-on-year (YOY) growth in April, and non-oil imports, which posted a 10.8 per cent YOY contraction, are the two critical economic indicators that give a direct snapshot of the extent of the downturn.

The recent statement by the Reserve Bank of India governor, wherein he indicated policy preference for further easing in interest rates in the face of the industrial downturn, has led to a renewed focus on the domestic macro-economic picture. The stance of the apex bank reflects a high possibility of a rate cut, I-Sec said.

Though the first quarter of a financial year happens to be typically a slack period for credit growth, the numbers this year are unusually weak.

Over a period stretching 13 weeks back from the first week of June (thus allowing the year-end effect to even out), non-food credit has shown an increase of Rs 1,945 crore, or an incremental growth of 0.4 per cent. This compares with Rs 12,510 crore growth seen in last fiscal. Thus, YOY non-food credit for the period under consideration has declined by 84.5 per cent.

If the nominal credit growth is deflated by price level changes, the real credit growth in the current fiscal will appear even worse in comparison to earlier years, the company said.

Going forward, stimulating credit pick-up from the current low levels is likely to be a key priority for the central bank. In this regard, a look at the recent and expected trend in manufacturing inflation and thereby the real interest rate faced by the manufacturers is necessary.