A series of interest rate cuts in India has failed to lead to cheaper commercial lending, leaving Asia's third largest economy to grow at only 6 per cent this year, the central bank said on Tuesday.
The Reserve Bank of India expressed frustration in its annual policy statement that monetary adjustments to stimulate the economy in the face of the global financial crisis had not resulted in significantly lower lending rates by commercial banks to the private sector.
In a sign of deepening concern about the economy, the RBI issued the first official growth forecast under 7 per cent and cut its key repo lending rate by 25 basis points to 4.75 per cent.
"While the response to policy changes by the Reserve Bank has been faster in the money and government securities markets, there has been concern that the large and quick changes effected in the policy rates by the Reserve Bank have not fully transmitted to banks' lending rates," said Duvurri Subbarao, RBI governor.
"During the second half of 2008-09, while the Reserve Bank has reduced its lending rate by 400 basis points, most banks have lowered their lending rate in the range of 50-150 basis points."
The RBI said growth would slow to 6 per cent in the 2009-2010 fiscal year, at the upper end of economists' projections and a far cry from recent growth of 9 per cent. It also trimmed its forecast for the fiscal year that ended on March 31, saying GDP growth had fallen to 6.5-6.7 per cent from an earlier forecast of 7 per cent. The government's statistical office had forecast 7.1 per cent only two months ago.
"Like all emerging economies, India too has been impacted by the crisis and by much more than what was expected earlier. The extent of impact has caused dismay," said Mr Subbarao.
India's industrialists on Tuesday renewed calls for monetary easing, complaining that a severe stoppage of credit to small and medium- sized businesses risked prolonging the downturn.
"Current macroeconomic conditions of weak growth and declining prices call for a further fall in the interest rate at which credit is available," said Venu Srinivasan, president of the Confederation of Indian Industries.
Further rate cuts are expected when a new government takes office following parliamentary elections that end in mid-May.
Economists are alarmed by the gap between the repo rate and prime lending rates of 10 per cent. They say lending costs far too much and blame the RBI for over-tightening monetary policy last year to counter inflation.
"There is anger among the business community about the inability of the RBI to force through lower interest rates to lending rates," said Rajiv Kumar, director of the Indian Council for Research on International Economic Relations.
Copyright: The Financial Times Limited 2009
