At a time when the US Federal Reserve has cut its rate three times since September 18, the Reserve Bank of India (RBI) has left its policy rates — CRR, repo, reverse repo and bank rate — untouched. Meanwhile, credit growth is falling, which is expected to impact GDP growth rate. Economists believe 2008-09 should see over a 100 basis points shaved off India’s GDP growth to 8 per cent or thereabouts. A cut in the repo rate (the rate at which RBI lends money to commercial banks, currently at 7.75 per cent) would have helped, but in the RBI’s and the government's opinion, that would have pushed inflation higher.Already, the price of oil has been on the rise, as have been prices of other global commodities including food. RBI's cautious stand is: “The policy endeavour would be to contain inflation close to 5 per cent in 2007-08 while conditioning expectations in the range of 4-4.5 per cent.” The credit and deposit growth have flipped places from the previous year. In January 2007 credit growth and deposit growth stood at 31.9 and 21.5 per cent. Now they stand at 22.2 and 23.8 per cent. Thus, credit growth is down and stands below the deposit growth rate.A concern that looms large is that if India's interest rate differential widens significantly with that of the US, it would head towards a situation where the RBI will have to go for steep cuts. Economists are of the view that the RBI does not need to cut rates the way the US has been doing. However, they also expect that the rates should move in the same direction. If past parallels between US Fed rate cuts and RBI cuts are seen, one can figure out that Indian interest rate cycles have lagged behind that of the US by two to 18 months.The US Fed went in for its rate cut in January 2001 when it was hovering around a high 6.5 per cent. RBI followed the move and came up with its first repo rate cut two months later, in March. The repo rate at that time stood at 10 per cent. By the time RBI came with its rate cut the Federal Reserve had cut its rate by three times — from 6.5 per cent to 5 per cent — and continued with its policy for more than two years till June 2003, when the rate went down to touch a low of 1 per cent. RBI continued with its repo rate cut till March 2004 to see the repo rate standing at 6 per cent.The second set of changes came in June 2004 when the Federal Reserve reversed its policy and went in for an upward revision of interest rates. The Fed went on to raise its interest rate from 1 per cent in June 2004 to 5.25 in June 2006. Relatively speaking, RBI followed the Fed's move rather late — after 18 months. But, by then the Federal Reserve had raised its rates 11 times, from 1 per cent to 4 per cent. RBI followed the US interest rate cycle once again and went ahead with its upward revision from 6 per cent in October 2005 to 7.75 per cent February 2007.The two instances suggest that there is no direct correlation between interest rate movements in the US and India. Though the RBI follows the US cycles broadly, it may not be immediate and depends on macroeconomic factors prevailing in India. The US has been on a rate cut mode to bring its economy out of a visible slowdown and to encourage people to borrow, spend and invest. The economic situation in India is different. But the high interest rate regime has started to reflect now on credit growth. Sooner or later, RBI will have to go in for a rate cut to keep growth rates going and the exchange rate at a comfortable level.
