Bombay Dyeing

Through the monetary policy, the RBI should send the right signals by making more money available at cheap rates.

The Indian economy is showing sure signs of slowing down. The growth in industrial production has decelerated and some major industries are facing negative growth in the second half of the year. The factors mainly responsible for this situation are infrastructural inadequacies, liquidity crunch and high interest rates. Unless these issues are tackled squarely, the economy may face a serious situation.

From the point of view of monetary policy, there is an urgent need to improve the liquidity situation. Fortunately, inflation is at a reasonable level of around 6.5 per cent and there is no reason to pursue a tight money policy.

 

A reduction in CRR of about two percentage points will help in mitigating the situation to some extent.

Another issue is the high level real interest rates in the country. Serious steps need to be taken to bring down the interest rates by a couple of percentage points. It is extremely difficult to sustain new investments at such high rates of interests. There is also an urgent need to revive the sagging capital markets.

Apart from the fiscal measures required to stimulate the stock markets, easier availability of finance against shares and stocks will help prop-up the market.

It is hoped that the RBIs new monetary policy will take some positive steps in this direction.

There is an imperative need to re-adjust our focus. Growth either in India or in any other developing economy is factored with inflation and while drafting monetary policy, must recognise this fact. The interest rates have to come down with this monetary policy. While talking about globalisation it is imperative to consider that the rates of interest abroad when compared to our country is in multiples not even percentages.

I would expect the CRR to be lowered as a natural corollary to the liberalisation which has taken firm roots. That would definitely allow more funds to flow to the corporates.

Optimal utilisation of funds are a different matter altogether and that is something which no monetary policy can rectify.

The RBI will not go in for a massive cut in CRR requirement as this could fuel inflation. They will effect a cut in such a way that credit squeeze is eased while at the same time ensuring that money supply does not grow disproportionately. The maximum cut could be around one per cent. The RBI also has other issues to take up. They could also tinker with the credit delivery system.