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India Inc welcomes RBI's repo, CRR cuts

Posted on Jan 29, 04:34PM | IBNS

New Delhi, Jan 29 : Indian Inc on Tuesday reacted positively to Reserve Bank of India's (RBI) decision to cut policy repo rate and Cash Reserve Ration (CRR) rate.

The RBI on Tuesday announced reduction of its policy repo rate by 25 basis points along with CRR rate, a move for the first time in past nine months that is aimed at boosting slow economic growth.

"At a time when slowing consumption and investment demand is derailing the growth momentum of the economy and industry, the decision of the RBI to ease the monetary policy by reducing repo rate and CRR will go a long way in reversing the downward trend," said Confederation of Indian Industry (CII) in a press release issued here on Tuesday.

"RBI's decision to ease the monetary policy through a repo rate and CRR cut is a welcome step as it sends out a positive signal that the Central bank has now joined hands with the government to revive the growth momentum of the economy, which had to so far largely focused on containing inflation," said Chandrajit Banerjee, Director General, CII.

"Government's continued thrust on reforms along with the downtrend in WPI-based inflation has provided necessary leg-room for RBI to maneuver its policy in favour of growth. However, CII would have been happier with a larger reduction in repo rate," Banerjee said.

"Core inflation, which is regarded by the RBI as the key indicator of demand-side pressures, has declined sharply in last few months. Monetary policy is not the right instrument to address the supply-side constraints facing the economy. Against this backdrop, the decision of the Central Bank to ease repo rate by 25 bps is indeed a prudent step," he said.

Agreeing with RBI that reviving investment is the key to economic turnaround, the CII has underlined the need for both fiscal and monetary policy to work in tandem in order to ensure that the growth prospects of the economy are revitalized.

The CII agreed with RBI that fiscal consolidation should not happen at the cost of curtailing government expenditure on plan/capital heads, which, along with removal of structural impediments, is critical for crowding in private investment to pull the economy out of the current slowdown.

"For investment demand to sustain, it is important that consumer demand is revived too. Soft monetary policy stance in this regard becomes an integral part of the overall strategy to revive growth," stated Banerjee.

In agreement with RBI that nearly half of critical infrastructure projects are delayed owing to issues pertaining to land acquisition/ environmental clearances/tie-up of project financing/finalising of engineering designs, lack of infrastructure support and linkages, and other contractual procedures, Banerjee stressed that sustaining reform momentum is the key to overcome such bottlenecks.

He however added that in the current milieu of low business sentiments, monetary policy too has an equally important role in restarting the investment cycle.

"In order to address the precarious liquidity situation in the economy, RBI has infused liquidity of Rs 1.3 trillion through outright OMOs so far in the current fiscal. It has also supplemented this by paring the cash reserve ratio (CRR), in order to ensure that availability and cost of credit do not remain a challenge for the industry.

"In this context, it is heartening to note that the RBI in its policy review held today, cut the cash reserve ratio (CRR) by further 25 bps in order to infuse liquidity into the cash-starved financial system," he said.

The CII complimented the central bank for this wise move, as adequate liquidity is essential for facilitating monetary policy transmission and thus enabling adequate flow of credit to the productive sectors of the economy.

The Indian Chamber of Commerce (ICC) has appreciated the RBI's decision to lower its key policy rates for the first time in 9 months, and felt that this move would go a long way in supporting an economy which looks set for its slowest growth in a decade.

"The moves to cut the Policy Repo Rate by 25 basis points to 7.75 pc , and the Cash Reserve Ratio (CRR), the share of deposits banks must keep with the Central Bank by 25 bps to 4.00pc , which will infuse an additional estimated 180 billion rupees into the banking system, are surely welcome steps," said ICC President Rajiv Mundhra.

"These will surely boost investment and growth, and would contribute towards putting India back to a higher growth trajectory," he said.

"While Repo Rate cut will reduce the cost of borrowing for individuals and corporates, the reduction in CRR would improve the availability of funds and boost investment," he said.

While lauding the Central Bank's decision of taking an enabling Monetary Policy stance, the ICC expressed concern about the widening Current Account Deficit, and said that the inability to reign in the overall fiscal deficit may increase the Current Account Deficit risk, and further crowd out private investment and stunt growth impulses.

Mundhra called for strong fiscal prudence measures and emphasized upon complementary efforts from the fiscal authorities.

There is a need for further reforms to raise productivity, improve competitiveness and manage supply constraints to support growth which has been below trend for quite some time, felt the chamber.

Reacting to the cuts, Seshagiri Rao, JMD and Group CFO, JSW Steel, said: "It was much needed given that the GDP growth is moderating and industrial production is decelerating month after month."

The RBI rate cut is an encouraging move at a time when high interest rates were having negative impact on the country's economic growth, he said.

"There are tight liquidity condition in money market as reflected by borrowings under repo window over Rs.1,00,000 crore. More liquidity injection by RBI is the need of the hour as 0.25pc CRR cut releases only Rs.18000 crores.

"The transmission of lower interest rate to borrowers in response to cut in repo rate should take place swiftly as the banks have already reduced deposit rates for the past few months," he said.

On Tuesday, RBI governor D Subbarao said: "Based on an assessment of the current macroeconomic situation, we have decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 8.0 per cent to 7.75 per cent."

Consequent to this, the reverse repo rate under the LAF, determined with a spread of 100 basis points below the repo rate, gets calibrated to 6.75 per cent. Similarly, the marginal standing facility (MSF) rate, determined with a spread of 100 basis points above the repo rate, and also the Bank Rate stand adjusted to 8.75 per cent.

These changes have since come into effect immediately after the announcement.

"We have also decided to reduce the cash reserve ratio (CRR) of scheduled banks by 25 basis points from 4.25 per cent to 4.0 per cent of their net demand and time liabilities (NDTL) effective the fortnight beginning February 9, 2013," said Subbarao.

"This reduction in the CRR will inject primary liquidity of around Rs 180 billion into the banking system," he said.

RBI said the decision to further ease the monetary policy stance was informed by three considerations.

"First, both headline wholesale price inflation and its core component, non-food manufactured products inflation, have softened through the third quarter. This provided some relief from the persistence that dominated the first half of the year. Several indicators such as the weaker pricing power of corporates, excess capacity in some sectors, the possibility of international commodity prices stabilising as well as inflation momentum measures suggest that inflationary pressures have peaked," said Subbarao.

"However, further moderation in inflation going into the next fiscal year is likely to be muted as the correction of under-pricing of administered items is still incomplete and food inflation remains elevated. Accordingly, the setting of monetary policy has to remain sensitive to these conflicting pressures and attendant risks," he said.

"Second, growth has decelerated significantly below trend through the last fiscal year and through this year so far, and overall economic activity remains subdued. On the demand side, investment activity has been way below desired levels and consumption demand too has started to decelerate. External demand has also weakened due to languid global growth.

"On the supply side, constraints in the availability of key raw materials and intermediates are becoming binding. While the series of policy measures announced by the Government has boosted market sentiment, the investment outlook is still lacklustre, especially in terms of demand for new projects," he said.

The third consideration that informed RBI decision is that liquidity conditions have remained tight.

"Although the Reserve Bank lowered the cash reserve ratio, CRR, successively in September and October 2012, and carried out open market operations (OMO) injecting systemic liquidity of '470 billion during December and January to augment liquidity, the average net LAF borrowings at '910 billion in January have been above the Reserve Bank's comfort level.

"This tightness could potentially hurt credit flow to productive sectors of the economy. The structural deficit in the system provided a strong case for injecting permanent primary liquidity into the system," said Subbarao.