RBI need not react to bond yields, MSP for interest rate review: ASSOCHAM

The Reserve Bank of India (RBI) should not over-react to the high yield pressures of the bond market, along with the government promising a substantial revision in the Minimum Support Price (MSP) for farmers and refrain from going in for any hike in the benchmark policy lending rates when the Monetary Policy Committee meets on February 7, the ASSOCHAM said on Sunday.

"Yes, some of the macro indicators, including pegging of higher fiscal deficit of 3.3 percent for FY' 2019 and 3.5 percent of the Gross Domestic Product (GDP) for the current fiscal, look difficult, but reaction of the bond market to the budget-related would ease out soon," said the chamber in a Position Paper on the Financial Markets, post-Budget.

It said the concerns over the MSP leading to increase in retail inflation are exaggerated for various reasons.

"In the first place, effectively, there is no MSP for the vegetables at the ground level. As for the Operation Green for onion and potato, the entire institutional mechanism would have to be worked out by the NITI Aayog along with the states. So is the situation with regard to the MSP for several other agri commodities. While the NITI Aayog and the states would bear in mind the farmers' interest, the institutional mechanism would surely strike a balance between remuneration to the growers as also the impact on the retail prices. So, the immediate fear may be an over-reaction and the RBI should not get influenced while fixing the REPO (policy lending) rates in the coming week."

In so far as the stock market is concerned, it is a healthy correction which was overdue.

"A lot of froth and unnecessary exuberance had gathered around the stocks, particularly in the mid-cap space and there was no justification while matched against the corporate earnings. In fact, one of our earlier papers had cautioned about wild fluctuations in the market in 2018 in the backdrop of head winds like rising crude oil prices, revenue implications of the Goods and Services Tax (GST) roll out and other pressures on the fisc," said ASSOCHAM Secretary General D S Rawat.

The paper said, as is well recognised by the Union Budget, creation of jobs on a massive scale is the need of the hour.

"While the government has realised this fact, it is time the RBI joined the initiative by ensuring that the growth which seems visible, should be encouraged by at least not revising the interest rates upward, if at all the present macro situation does not favor any reduction.