MUMBAI (Commodity Online): The Reserve Bank of India (RBI) should reduce the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) in view of the easing of inflation in November to 9.1% from 9.7% in October. Money market is facing a liquidity crisis on account of monetary tightening policies pursued by RBI to curb inflation in the economy.
The RBI will release its Mid-Quarter Review of monetary policy on December 16, Friday afternoon and it is expected that the central bank may further announce monetary tightening measures.
“The easing in the annual rate of inflation for Nov’11 to 9.1% (vis-a-vis 9.7% in Oct’11 and a 6 month low) provides the ideal foil for the RBI to soften its anti-inflationary stance in the forthcoming monetary policy review” said, Mr.Harsh Mariwala, President, Federation of Indian Chambers of Commerce and Industry (FICCI).
“”The significant slowdown in investment as well as consumer demand as revealed by the latest IIP numbers, clearly warrants a pro-active policy stance by the RBI through a rate cut”, observes Mr Mariwala. In fact, central banks around the world (for example, People’s Bank of China) have already turned dovish, even as the inflation rate is still higher than the central bank targets. “A forward looking policy stance by RBI will clearly act as an enabling factor and do a world of good”, feels Mr Mariwa.
Confederation of Indian Industry (CII) has pointed out that focus of RBI should now shift from encouraging growth rather than controlling inflation considering the fact that industrial production is declining and investment scenario remains bleak.
The RBI should reduce interest rates to gradually reverse the impact of the 13 interest rate hikes it has undertaken over the last two years. RBI should also implement measures to contain the sharp decline in the value of the rupee as this would exacerbate inflationary pressures and take away any gains from the moderation in global commodity prices.
Instead of reducing repo rates, there is a strong case for the central bank to cut CRR by 50 basis points from six per cent. This will release about Rs 30,000 crore into the system, said The Associated Chambers of Commerce and Industry of India (ASSOCHAM) ahead of the RBI’s mid-quarter review.
Banks currently continue to withdraw from the RBI’s repo window to cope up with growing shortage of funds, said secretary general D.S. Rawat. “Slashing CRR will improve the profitability of banks and enable them to pass on more funds to the industry.”
The central bank should also consider lowering SLR by one or two per cent to ensure that funds flow at reasonable cost to the infrastructure sector, he said. This will give impetus to the fund-starved sector which is facing huge challenges.
With economic growth slowing and the threat of contagion from Europe strengthening, there should be some monetary action, said Mr Rawat. Moreover, liquidity in the system is under stress with banks borrowing substantially more from the liquidity adjustment facility (LAF) of RBI than what it desires.
Banks have been drawing an average of Rs one lakh crore daily since November 24 using the LAF window at 8.5 per cent repo rate. The regulator's comfort level is one per cent of net demand and time liabilities which is about Rs 60,000 crore.
The mid-year economic review projects a slashed-down growth rate of between 7.5 and 7.25 per cent for the current year, down from the budget projection of nine per cent or more.
Along with this, the trade deficit is projected to balloon to between 155 billion to 160 billion dollars. “Funding current account deficit will surely be a problem as this was being comfortably met so far from capital inflows. The fiscal deficit is also shooting with government revenues rising by seven per cent and expenditure going up by ten per cent,” said Mr Rawat.
The rupee is depreciating as funds flow from overseas has abated because of global uncertainty. This will further fuel domestic inflation as India is import dependent country and chronically imports more than it exports. “On the whole, a rather bleak economic situation and prospects for 2012,” he said.
The economy has been experiencing a slowdown with GDP growth dipping to 6.9 per cent in the second quarter, the lowest rate of expansion in over two years. The eight key infrastructure industries witnessed dismal growth of 0.1 per cent in October, the lowest in the past five years.
