With inflation at 5 year low, RBI must cut interest rates: ASSOCHAM

"After a long duration of consistency in the Repo rates, ASSOCHAM believes that the RBI could reduce the policy rate by 25 basis points," the chamber's Secretary General D S Rawat said in his letter to the RBI Governor, ahead of the impending credit policy review by the Monetary Policy Committee.

It said a strong case was made out for a reduction in the interest rates, keeping in mind new lows in both CPI and WPI inflation. "The consumer price index (CPI) in June reached an almost-5 year low at 1.54 per cent, from 2.18 per cent in the previous quarter. The wholesale price index (WPI) also eased to 0.9 per cent from 2.17 per cent".

The case for rate-cut is additionally strengthened by easing of food inflation to (minus)-2.12 per cent from 0.31 per cent. Good monsoon forecasts for the current financial year have additionally created a stance for further reduction in the food inflation. The Current Account Deficit also continues to remain stable on account of stability in the crude-oil prices, since last one year.

"The deceleration in factory output growth could further bolster the case for a rate cut next month to boost Asia's third-largest economy, which grew 6.1 per cent in the January-March quarter - its weakest pace in more than two years", the  chamber said.

Hoping for a due consideration of its demand for a rate cut by the Monetary Policy Committee (MPC), the ASSOCHAM said, the RBI also needs to come out with a special dispensation for loan recovery from the Small and Medium Enterprises as also the mid-sized corporates. "We also expect in the policy some directional guidance and softer measures on recovery from SMEs and Mid-corporate.'

Making a plea to the MPC, through Dr Patel, Mr Rawat said given the high leverage causing a big drain on the balance sheets of a large number of companies, a cut in the lending rates would be a big relief to different sectors of the economy.