Budget 2018: Don't overreact to bond mkt with rate hike, Assocham tells RBI

The Reserve Bank should not "over-react" to high yield pressures in the bond market and refrain from hiking interest rates in its next monetary policy review on February 7, industry body Assocham said.

"Some of the macro indicators, including pegging of higher fiscal deficit of 3.3 per cent for 2018-2019 and 3.5 per cent of the GDP for the current fiscal, look difficult, but reaction of the bond market would ease out soon," Assocham said in a post-Budget paper.

It said the concerns over the minimum support price (MSP) leading to increase in retail inflation are "exaggerated" as there is no MSP for the vegetables at the ground level.

"The Reserve Bank should not over-react to the high yield pressures of the bond market, along with the government promising a substantial revision in the 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," it said.

The RBI is scheduled to announce its sixth bi-monthly monetary policy statement for 2017-18 on February 7. In the last policy on December 6, 2017, the RBI had kept key policy rates unchanged.

Assocham said for 'Operation Greens' for onion and potato, announced in the Budget, 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," it added.

With regard to stock market valuations seeing a decline, Assocham said 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," Assocham Secretary General D S Rawat said.

It said, while the government has realised this fact, it is time RBI joined the initiative by ensuring that the growth which seems visible, should be encouraged by at least not revising the interest rates upward.