July 27, 2024

The MPC of the RBI has decided to hold interest rates at their current levels in its 5th bi-monthly policy review this year. Hence repo rate remains at 6 percent, despite a clamour for its reduction from industry captains and even the government. Similarly, bank rate remains at 6.25%, reverse repo at 5.75 and marginal standing facility at 6.25.

It is a sensible move on part of the MPC. The RBI had decided that inflation was the first demon it needed to tackle and had fixed a 4% rate of inflation that it could allow to happen. Since too many things have happened recently – the festival and marriage season, GST and demonetization – that have all pushed prices north and the inflation index is hovering close to 4%, there is no way the MPC could have lowered rates this time without going against its own set standards.

In any case, lower interest rates are not a guarantee for fresh investments. This is just a ruse by industrial barons to lower costs and make additional profits. If one has a good project, knows that the product will sell and has all other things in place, one will not junk, or even delay, it just because the interest rate is slightly higher. The main point is availability of funds and Indian banks are flush with funds which they can lend to good projects and clean borrowers.

The latest figures have shown that demand is picking up across all sectors. Factory output is also higher than last quarter. In such a scenario, industry should identify products that need more production and set up projects instead of waiting for lower rates. Lower rates will happen in due course. But if competitors cater to the rising demand of goods and services, those who are waiting for lower rates will be left wringing their hands.