HSBC Cautions Rate Cut Wrong Medicine To Cure Indias Flagging Growth (15-Jun-2012)
Amid mounting speculations that the Reserve Bank of India (RBI) would resort to monetary easing measures in order to bring Asia's third largest economy out of doldrums, one of world's leading investment banks - HSBC in its recent report has cautioned that cutting benchmark interest rates would not be a wise decision to stimulate the flagging Indian economy. Indicating that liquidity easing would be the ~wrong medicine~ to cure the growth ails; the investment bank suggested that the government should instead focus on pushing deeper structural reforms.
HSBC explained that at a time when India's economic growth rate has dipped substantially to nine year low levels in January-March quarter 2012 and industrial production remains feeble, the nation remains in desperate need of heavy dose of structural reforms. The RBI's decision to slash key interest rates by 25 basis points in its mid quarter monetary policy review meeting on June 18, despite sticky and elevated inflation could further augment the inflationary pressure in the Indian economy.
The recent WPI inflation data for the month of May indicated that the rate of price rise quickened slightly to 7.55 percent as against 7.23 percent in April while CPI inflation exceeded 10 percent levels. Despite some relief due to cooling of international crude oil prices, the chances of moderation in inflation levels remains limited because of the sharp depreciation in Indian rupee and tight capacity.
Moreover, HSBC in chorus with many other influential financial institutions has gone ahead and downgraded India's economic growth forecasts to 6.2 percent for financial year 2012-13 from earlier estimates of 7.5 percent. Though the investment bank is of the belief that India's annual and sequential growth will remain 'quite moderate' in the coming quarters, however the bank expects some economic recovery in the subsequent fiscal year. It expects India's gross domestic product (GDP) growth rate would rebound to about 7.4 percent in financial year 2014, but the revised growth rate remains lower than 8.2 percent forecasted previously.
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