No proof that high interest rate led to low growth: RBI

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Reserve Bank Deputy Governor K.C. Chakrabarty on Friday sought to stave off criticism that the nine-year low GDP growth was primarily due to the 20-month high interest rate regime, saying it was driven by a host of other factors.

"I don't think that the interest rates are that high, or our policy rates are that high that should significantly affect growth. Growth is being affected for a variety of reasons. We are overplaying the interest rate aspect (for low growth). It may be one of the reasons," Chakrabarty told the Skoch summit here.

Buttressing his point further he said, "I don't know how much growth sacrifice is due to lack of productivity, lack of efficiency, and how much is it due to inflation."

At 6.5 per cent, the economy slumped to the lowest rate in the past nine years in FY12, and many have blamed the Reserve Bank's tight monetary policy, coupled with the policy paralysis and lack of strong political will at the Centre as the reasons for the poor show.

Between March 2010 and October 2011, the RBI ramped up its key lending rates by a whopping 375 basis points in a 13 uninterrupted rate hikes cyle to batten down inflation which was near double-digits.

But ironically, price index still hovers near 8 percent, while growth has plunged, inviting criticism from many quarters, especially the industry.

However, Chakrabarty admitted that interest rates do affect growth, saying "what we are saying why interest rates affect growth is because inflation affects growth. If inflation comes down, interest rate will also come down. But to say that growth is only going (down) because of high interest rates is a little bit exaggeration and we must look into that."

"If inflation comes down, definitely monetary policy rate will come down," he said, adding that "for the Reserve Bank, the first priority is inflation. It is not only growth, we have a multiple indicator approach. But, inflation is definitely the major concerns."

Arguing that even a 2 per cent drop in interest rates by the EBI will not majorly help bring down cost for corporates, he said, "6-7 per cent of overall cost for a any company is the interest cost. Even by reducing interest by 2 per cent, their cost is not going to be impacted."

Countering the view that low GDP growth was driven by low investment growth, he said the GDP growth in fact came off the 2002-08 highs due to poor manufacturing growth.

"Our manufacturing growth used to be at one stage 8-9 per cent. That means we have a capacity of 8-9 per cent. Now it is only 2-3 per cent. If so, where is the question of additional investment? Immediately you can ramp up manufacturing growth, as there is an output gap," the Deputy Governor said.

On the impact on global economy with a possible exit by Greece from the eurozone, he said, "It will have some impact, adverse impact that is all I can say," adding that if there is any problem arising from this, then the government and RBI will switch to their contingency plan.