Report by OD bureau, New Delhi: The declining trajectory of inflation should spur the RBI to revisit its monetary policy stance and cut its policy rates to revive investments and rejuvenate industrial as well as economic growth which have been hit by high interest costs and flagging investments said CII in its representation to the RBI for its pre-policy consultation on second quarter review of Monetary policy 2012-13.
“RBI should bring down Repo rate from its current level of 8%, by 50 bps immediately and another 50 bps subsequently during the course of the financial year. Simultaneously, Cash Reserve Ratio (CRR) should also be brought down by 75 bps from its current level of 4.5% by the RBI in the second quarter Monetary Policy due to be announced by this month end. This would not only help revive business sentiment and enable companies to raise capital at affordable cost but would also ensure that liquidity in the economy remains adequate”, said Mr. Chandrajit Banerjee, Director General, CII. Countries like China have also reduced policy rates to spur growth, Mr Banerjee added.
CII has pointed out that while the government has started to address the fiscal side by announcing a slew of policy reforms last month, it is hoped that attempts will also be made to revive the investment cycle and the overall growth from the monetary side.
Admittedly WPI-based inflation has remained above the comfort level so far this fiscal and is an area of concern. However, the improvement in rainfall during the latter part of the season and a sharp reduction in international raw material prices supported by stronger rupee are expected to bring down the overall price levels according to CII.
“In fact, the actual impact of the fuel price hike on core inflation was less than anticipated. In this situation, it is very important to improve the investment sentiments by bringing down Repo rate which with a lag feeds into the interest rate structure of the country”, Mr Banerjee said.
The RBI should create a special dispensation in the NPA norms for specific debt laden sectors such as textiles. This would help indebted companies and sectors to undertake corporate debt restructuring to take advantage of the bottoming out of the business cycle. The definition of NPA should be modified to include default of credit facility beyond two quarters, CII has suggested to the RBI.
Checking rupee volatility should be accorded primary importance and CII suggested that the RBI should temporarily open a special window to supply dollars to oil companies for the initial period of six months to ring-fence the currency market. A direct dollar line to oil companies would help check volatility in currency markets and bring stability in trade.
CII has also suggested that the RBI should consider extending new banking licenses to private sector players to ensure that the banking sector grows in size and sophistication to meet the needs of a modern economy as well as for achieving financial inclusion.