Cheaper credit doesn't always spell faster GDP growth
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Jun 28, 2024 | Page No.: 12 | Position: Bottom Left | Source: Madan Sabnavis | Sq Cm: 439 | AVE: 285194 | PR Value: 1425970
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THEIR VL Cheaper credit doesn t always spellfaster GDP growth impeding factor for investment In fact for ranged from 10-12 during the period was 6 28 If the period is stretched back to Ideally for a country like India a range of MADAN SABNAVIS non-financial companies interest cost as a Hence there is room for discussion on the 2012 for 98 months it was 6 90 Once the 6-6 5 is what can be expected under nor- proportion of turnover is just 3-4 and is link between the repo rate and GDP growth rate was lowered to 4 however a down- mal conditions If inflation can be sustained lower than the share of power expenses or The school that is for repo-rate reduction ward bias took effect and the last 51 months at low levels of around 4 for a year or so promotion and distribution costs Hence also points to the fact that the absolute num- averaged 5 1 as the rate was pegged at 4 then 5 5-6 could be a range to expect just as how higher raw material prices do not ber is very high The central bank rate in for 24 successive months Second the real repo rate is still on the There are growing calls fora reduction get in the way ofproduction provided there India cannot be compared with that in other A different picture emerges when we look lower side at around 1 and unless inflation in the repo rate The argument is not is demand interest costs do not countries such as the US or Eurozone at the real interest rate calculated as the dif- comes down substantially on a durable basis so much that inflation has come down When investment decisions are taken because it has to be seen in the context ofthe ference between the repo rate and CPI infla- it would be hard to argue fora rate cut based but that potential growth will get affected companies work out their return on capital prevailing inflation rate In India the central tion rate for that month The differences are on this argument This is contrary to the majority view that as based on future revenue streams adjusted inflation target has been set at 4 while it is interesting For the five years preceding the Third the crux will be India s inflation growth is very much on target with the for costs and compare them with the market generally closer to 2 in Western econo- pandemic the real repo rate averaged 2 path in the coming months Will we actually Reserve Bank of India RBI projecting it at rate of interest Higher costs get transmitted mies The reason is that headline inflation in This was higher than the average of 1 for see CPI inflation stay durably in the vicinity 7 2 for the year monetary policy focus can to final prices when conditions are good as India is swayed dramati- the 98 months starting of 4 In the last 150 months it was above remain on inflation control This is different is the case presently Now in the traditional cally by food prices due • • • January 2012 But when 5 in 93 months while it was between 4 is chief economist at Bank of from the stance RBI took during the pan- world when interest costs were fixed this to heavy dependence on QUICK READ the pandemic period and 5 on 28 occasions In 29 months it was Baroda and author of demic which was to do everything to pro- equation was relevant Today all rates are monsoon rains as well as starting March 2020 is less than 4 a period during which it was Corporate Quirks The Darker tect growth But that was a black swan event pegged to either an external benchmark pricing policies of the If there s vibrant market demand considered up to May concentrated in 2017-18 and 2018-19 If the Side of the Sun and using the same logic today when the lending rate EBLR or the marginal cost government But the high interest rates don t get in 2024 the real repo rate central bank is looking at inflation of4 5 in economy is cruising along well after regis- lending rate MCLR which are reset peri- basic question is whether the way of investment For non- averages -0 81 And 2024-25 with food inflation still a major tering a high growth rate of 8 2 in 2023-24 odically by lenders The current rate of or not RBI s repo rate is financial companies interest finally the average real concern today assuming a smooth glide may be misplaced interest cannot be the benchmark used as a high in nominal terms cost as a proportion of turnover repo rate for the period path would be tricky Conceptually when interest rates are loan for say five years will see its pricing vary Historically the repo is just 3-4 It is not a big burden when RBI kept it The country s inflation pattern is pertinent high companies borrow less which slows across the length of this tenure depending rate has tended to be unchanged at 6 5 for 16 because the RBI monetary policy commit- down investment That s what policy is sup- on the environment Interestingly for the high in India For exam- It s the real rather than absolute months was 1 12 tee s official charter is to target inflation at 4 posed to do However in practice it is not quinquennium ending 2014-15 which was ple for the 60 months policy rate that counts Inflation Some conclusions may within a band of 2 on both sides Growth is that simple Companies invest when they see around the time when bad loans cropped up preceding the beginning doesn t just need to be taken into be drawn from this data not the panel s mandate and hence inflation business opportunity and capacity utiliza- as a big issue bank credit grovvth was robust of the pandemic when account it s also what the central First is that the repo rate control should logically be the single most tion rates matter more If there is vibrant even though interest rates denoted by the the repo rate was low- bank s rate-setting committee appears to be at a fair important goal for policy demand higher interest rates will not be an weighted average lending rate on fresh loans ered to 4 its average must mandatorily focus on level in nominal terms These are the author s personal views