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Will RBI oblige corporate India?
Mon, 28 Sep Pre-Open

As per an article in Livemint, poor domestic demand and deflation have led to a rapid deceleration of prices. With this, Wholesale Price Index (WPI) is continuing its deflationary trend for the tenth month. The 12-month moving average of the WPI inflation indicates a 0.8% decline. For the month of August, it reached a level of -4.95%. Furthermore, core inflation, the inflation of non-food manufacturers, has been negative for the last six months. And the inflation with reference to the Consumer Price Index (CPI) is down to 3.5%.

Adding to this is the fall in corporate sector net sales. This has turned negative during the last two quarters. Based on RBI's order books, inventories and capacity utilisation databases, the average yearly capacity utilisation in 2014-15 stood at 72.65% as against 77.75% in 2011-12.

All of these data points calls for one thing – a lower of interest rates. The economy is moving at snail's pace. A reduction in interest rates will be one of the factors needed to spur up inflation and bring the economy on track.

Many sectors will be aided. Inflationary expectations led higher interest rates have so far been inhibiting capital intensive and other leveraged sectors. A rate cut may well contribute towards perking up demand for these sectors.

A sharp reduction in rates and better transmission of it by banks is what many in corporate Indian continue to hope for. With the RBI policy review set for tomorrow and its implications for the investment cycle, many companies - and especially the highly leveraged ones - will wait with bated breath.

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