For Growth’s Sake, Cut Rate by 1%, Says Kamath

Holding the rate doesn't seem to contain inflation, but could harm growth story, says ICICI chairman

The Reserve bank of India must go bold and big with a 100 basis-point reduction in its main policy rate to spur consumption, KV Kamath said on Wednesday. A sharp cut in the repo rate, he said, is urgently needed if the country's growth prospects are to remain unimpaired. 
"I would think that we need to head towards a 100-basis point cut soon," the chairman of the country's largest private lender ICICI Bank told ET in an interview. 
His call for aggressive rate-cutting by the Reserve Bank of India comes on the eve of the release of economic growth data for the April-June quarter which is expected to show gross domestic product expanding at its slowest pace in many years. 
"My only point is that we are not sure that holding the interest rate where it is now is doing anything to contain inflation. And the question is now whether it is doing harm to the growth story of the country," he said in his most forceful argument yet in favour of aggressive ratecutting by the RBI. 
The central bank has been citing concerns about inflation and the fiscal deficit, signalling that it is not in a mood to reduce the repo rate below the 8% at which it stands now. 
In April, governor Subbarao unexpectedly reduced the rate by 50 basis points. But equally unexpectedly in June, he left it unchanged. 
Kamath observed that while the fear of inflation is well placed, holding the rate at which RBI lends to banks at the current level has the potential to impact the consumption side of economic momentum. 
"I would think that we could experiment with lowering interest rates and seeing what happens to inflation, and what happens to the economy. And indeed as we see growth figures, the signal is very clear that even with errors and omissions growth is slowing down." The prime minister and the RBI expect the economy to expand by around 6.5% during the year to March 2013 but forecasts by private agencies are more pessimistic. A forecast by Citi even pegged growth at below 5%. In the March quarter GDP expanded by 5.3%, it slowest pace in nine years. Around the world central banks are lowering rates and in China there has been a dramatic slowdown in growth, Kamath said. "To me an even bigger worry is that we should not be seen as a complete outlier in what is being done on the interest rate front in the global context … We don't want to be caught in this overall global impact."