Biting the interest rate cut bullet

Today, when Reserve Bank of India (RBI) Governor D Subbarao unveils the mid-quarter review of the monetary policy, India has the dubious distinction of being the country that witnessed maximum rate hikes across leading developing and developed nations in the last three years. It was also the period when bank non-performing assets (NPAs) surged and home loan borrowers realised the harsh reality of repayment liability being passed on to their next generation.

Since August 2009, the repo rate has increased by a record 325 basis points (bps) to 8 per cent. When compared to others in the BRICS league, this is quite high. Russia saw a 250 bps decline in its key Refinancing Rate to 8.25 per cent during the same period. Brazil cut Selic Rate five times in the last one year to 7.5 per cent. China's Benchmark 1-year Lending Rate has fallen 56 bps to 6.00 per cent this year and South Africa cut repo rate by 200 bps to 5.00 per cent since 2009 with the last 50 bps cut coming in July this year. Euro area Main Refinance Rate is just 0.75 per cent and its inflation is 2.6 per cent despite all its woes.

The RBI's argument so far has been that India has high inflation with the consumer price index rise now at 9.7 per cent, whereas Brazil, Russia, China and South Africa reported inflation of 5.2 per cent, 5.59 per cent, 2 per cent and 5 per cent respectively. Each country may have its own set of problems. In India, it could be in the area of government finances or supply-side issues. The RBI has now got a good opportunity to catch up and push for lower rates with the government hiking diesel prices and opening up the aviation and retail sectors.

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