India industry
[Representational Image]Reuters file

Ahead of the Monetary Policy Committee meeting on February 7 and 8, industry body Nasscom has called on the Reserve Bank of India (RBI) and the finance ministry seeking the benchmark lending rate cut of up to 50 to 75 basis points (bps). 

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In the wake of the government's commitment towards fiscal consolidation as reaffirmed by Union Finance Minister Arun Jaitley in Union Budget 2017, industry experts are betting the RBI will cut the policy rate by at least a quarter of a percentage point at the end of its two-day meeting.

The finance minister on February 1 reiterated that the government will ensure its fiscal deficit does not exceed 3.2 per cent of the GDP. 

"As a majority owner of the banks and as a regulator, both the government and the RBI have roles in advising banks to pass on the commensurate reduction in the interest rates. This is all the more important in the wake of dismal credit growth, marked by subdued consumer demand and lack of investment appetite despite lowering of the lending rates," Assocham president Sunil Kanoria said.

While lower lending rates do help corporates raise debt without worrying much about paying a high rate of interest, fresh borrowing could still be some distance away as companies are still struggling with their high level of existing debts. 

The chamber said banks should pass on the benefit of lower interest rates on old loans through different means so that the interest burden for companies comes down.

"Along with other measures like protection of cheap imports, the benefits of the ample liquidity in the banking system must be extended to the firms, grappling with the old loan books, without much delay," Nasscom stated. 

Demonetisation has resulted in windfall gains for banks in the form of ultra low-cost funds from the current account/saving account (CASA). "The CASA rates are just about 3 to 4 per cent, while the base lending rates are still near the double digit. That is a huge spread for the banks which should transmit lower rates without necessarily cutting the time deposit rates," the trade body argued.

According to the Economic Survey released on January 31, the base rate came down marginally from 9.30/9.70 in April 2016 to 9.30/9.65 as of December 30, 2016, while term deposit rates for greater than one-year maturity period declined from 7.00/7.50 to 6.50/7.00 for the same period. The survey also expressed concern over "far from perfect" transmission of the rate cuts. 

The chamber expressed concern that the non-food credit (NFC) outstanding grew at sub 10 per cent for all the months except for September 2016. At the same time, credit growth to industrial sector remained persistently below one per cent during the current fiscal, with contraction in August, October and November.