RBI's stance on liquidity infusion has been a game changer: IMC

Indian Merchants' Chamber in its statement on the RBI's Third Monetary Policy states that the biggest change in the past few months has been the stance on liquidity infusion by the Reserve Bank of India through its Open Market Operations.

The chamber notes that the Government has been front loading its expenditure that has been instrumental in infusing liquidity into the markets.

The report also said that it is laudable that the RBI has chosen to not react

negatively to the uptick in inflation to around 5.78 percent backed by pulses and food inflation. They continue to see the Q4 fiscal 2016-17 inflation at 5 percent though with some small upside risks.

The policy clearly recognizes that Industrial Production as well as services sector including exports has shown a clear pickup in the last few months, though Investment activity has been lagging.

It is all the more creditable that this uptick has happened in a global context where events like Brexit and the possibility of Federal Reserve hiking rates have been keeping a lot of markets like Japan, China and Emerging markets on the edge.

The main concern for SMEs is the cost of money. This change is in the right direction, but it needs to get even better.

"The fact that the monsoons have been three percent above the long period average and also the fact that the area under cultivation has surged hold out promise for food inflation to come off. We also note with comfort that the 7th pay commission implementation which could have been mildly inflationary is being recognized as transitory and could be seen through," added President Indian Merchants' Chamber, Deepak Premnarayen.

However, IMC shares the RBI disappointment with the fact that the transmission of rate cuts by the banking system has not been proportionate to the policy cuts. The SME sector in particular, which does not access the bond markets, thus is primarily dependent on banking system would welcome rate cuts of a deeper sort.

"We would also urge that refinance windows at concessional rates could be opened to banks to fund the SME sector, administered through institutions like SIDBI, which would accelerate the flow of funds at lower rates to this sector, which is the bedrock of manufacturing in the country," added Deepak Premnarayen.

Concluding the policy, Deepak said that overall it has been a good policy under the circumstances, but there are hopes for further steps to enhance the process of lowering cost of funds to the small and medium sector through better rate transmission as well as through dedicated pools of refinance to banks to on lend to the SME sector.