India Inc on Thursday urged the Reserve Bank of India (RBI) to cut interest rate and reserve ratio to prop up growth. In a meeting with RBI Governor Shaktikanta Das in Mumbai, industry chambers proposed various measures to ease tight liquidity situation and reduce high cost of credit in the backdrop of falling inflation levels. The meeting comes ahead of the sixth bi-monthly monetary policy statement of the central bank for 2018-19 scheduled to be announced on February 7.
CII recommendations
The Confederation of Industry (CII) has sought policy measures for easing the tight liquidity situation by effecting a cut in cash reserve ratio (CRR) of at least 50 basis points. The industry body urged the central bank to take measures to facilitate flow of credit to industry, especially to MSMEs and infrastructure sector, and address the high cost of credit by considering reduction in repo rate of 50 basis points.
CRR, currently at 4 per cent, is the percentage of deposits kept as reserves with the RBI. Repo rate, currently at 6.5 per cent, is the rate at which the central bank gives loans to the banks.
The CII delegation, led by its president designate Uday Kotak, said in a statement that various surveys conducted by the chamber revealed “a positive outlook on both topline as well as bottom line fronts but were cautious on industry performance due to factors like liquidity crunch, delayed payments and suppressed consumer demand”.
On measures to address the financial challenges faced by the micro, small and medium enterprises (MSME), CII suggested that the RBI should consider limiting the collaterals sought by banks to 133 per cent of the exposure and eliminate the need for personal guarantees where sufficient collateral exists.
The chamber also recommended that letters of undertaking (LoUs) for buyers' credit for the cases where MSMEs investing to expand capacity may be permitted and the RBI might consider allowing banks to sanction buyers' credit facility to MSMEs, wherever import of raw materials is being done under letter of credit.
The CII urged that the Reserve Bank may revisit the lending restrictions on the weak banks under prompt corrective action (PCA) norms and consider allowing them to lend to the National Housing Bank which, in turn, can be used to finance housing projects through housing finance companies.
FICCI recommendations
The Federation of Indian Chambers of Commerce and Industry (FICCI) also asked for a cut in repo rate and CRR so as to enable lower lending rates by banks.
FICCI President Sandip Somany pointed out that a reduction in repo rate and CRR would revive the investment cycle in the country and will also boost consumption and support growth.
“The need of the hour is to have an accommodative monetary policy, focusing on growth. The objectives of the Monetary Policy Committee should not be restricted to only price stability but also to consider growth and exchange rate stability,” he said.
The RBI, which mainly factors in retail inflation, has been tasked by the government to maintain the inflation at around 4 per cent.
However, continued decline in food prices pulled down retail inflation to an 18-month low of 2.19 per cent in December, 2018. Another set of official data showed that the wholesale inflation also eased to an eight-month low of 3.80 per cent in December on softening fuel and food prices.
Meanwhile, the factory output based on movement in the Index of Industrial Production (IIP) slumped to a 17-month low of 0.5 per cent in November, 2018 on account of contraction in the manufacturing sector, particularly consumer and capital goods.
—With inputs from PTI