India Inc gives mixed reaction

The third quarter monetary policy review, which signalled the central bank’s intention to exit monetary stimulus measures, has evoked mixed reactions from India Inc. Most in the industry had expected the Reserve Bank of India (RBI) to increase the cash reserve ratio (CRR) by 25-50 basis points only.

However, even as the RBI did not alter repo and reverse repo rates, sources in the industry feel the 75-basis-point increase it has effected in the CRR to 5.75 per cent could lead to a rise in interest rates, which will jeopardise economic recovery.

Many say it is still immature to signal a tightening of monetary policy. Especially since such a measure, when coupled with fiscal tightening, might spell disaster for growth prospects. Further, most industry bodies expressed concern regarding the slow pace of non-food credit growth, at only 14.4 per cent as on January 15, 2010, lower than the 21.9 per cent growth seen during the corresponding period in 2009.

“Ficci feels that the tipping point has not yet arrived for tightening of monetary policy and, if one proceeds in that direction hastily, economic growth is bound to take a hit,” Federation of Indian Chambers of Commerce and Industry President Harsh Pati Singhania said.

The PHD Chamber of Commerce and Industry also expressed concern that the 75-basis-point increase in CRR, which will drain out Rs 36,000 crore of liquidity from the banking system, may adversely impact availability of funds for the industry .

“Although the Indian economy has exhibited impressive resilience, with a GDP growth of 7.9 per cent in the second quarter (October-December, 2009), the impact of a deficient monsoon, escalating food prices, burgeoning fiscal deficit, massive influx of foreign funds in the stock market and, above all, the uncertain global environment, could well find a reflection in 2010,” said Kajaria.

On the other hand, the Confederation of Indian Industry (CII) welcomed RBI’s “balancing act” and said it was essential to suck out excess liquidity from the system to contain inflationary expectations. Moreover, it stated the hike is not expected to have any short-term impact on lending rates as the system still has adequate liquidity.

“The central bank has given equal priority to strengthening the recovery process and control inflation,” CII President Venu Srinivasan said.