Monetary Policy: CII welcomes RBI's decision, but would have appreciated larger reduction
New Delhi, Jan.29: 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 CII in a press release issued here today.
"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. 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", said Mr. Chandrajit Banerjee, Director General, Confederation of Indian Industry (CII).
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.
Agreeing with RBI that reviving investment is the key to economic turnaround, 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. 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 Mr. 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, Mr. Banerjee has 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. CII compliments 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.