Mumbai, Oct. 21: India Inc today urged the Reserve Bank of India not to raise the policy rate at its October 29 review of the monetary policy and pressed for an easing of the liquidity crunch.
At a customary pre-policy meeting with the RBI officials, the industry associations are learnt to have urged the central bank to hold off on a repo rate hike. The repo is the rate at which banks borrow short-term funds from the RBI. It is currently pegged at 7.5 per cent. The repo is the only rate-signalling instrument in the RBI’s armoury since May 2011.
They also felt that the apex bank could reduce the marginal standing facility (MSF) rate — which is currently at 9 per cent — and could consider infusing greater liquidity into the system by cutting the cash reserve ratio (CRR) or permitting more open market operations (that is, purchase of government securities).
Banks tap the MSF window when there is acute shortage of cash in the system. On October 7, the RBI had reduced MSF by 50 basis points.
The CII said it had suggested that the RBI should send out a signal in the policy announcement that there would be no further tightening and it would start to move to a more accommodative monetary stance.
The CII has also suggested that a separate window should be opened for SME financing to ensure the availability of credit at affordable rates to the sector.
Assocham recommended that while currently the spread between the repo rate and MSF was 150 basis points it should be brought back to 100 basis points, by reducing MSF.
Some pundits believe the RBI will raise the repo by 25 basis points and others believe that it could also cut MSF by another 25 basis points to normalise the spread between the two rates at 100 basis points. The MSF rate went out of alignment in July when the RBI raised it by 200 basis points as a measure to contain the volatility in the rupee-dollar exchange rate. The RBI wanted to deter overnight borrowings by banks only to funnel it into the forex markets, which was precipitating the slide in the rupee’s value.
Assocham said because of the ongoing festive season and forthcoming state elections, money market liquidity could be constrained, thereby affecting the smooth flow of credit to productive sectors. In such a scenario, it suggested that the RBI could look at bringing down CRR by 50 basis points and raising OMO purchases. CRR is that portion of deposits that banks must maintain with the RBI. It stands at 4 per cent now.
CII wanted exports to be granted priority sector lending status. Banks have to earmark 40 per cent of their overall lending to the priority sector which comprises farm loans, SME lending and housing loans up to a ceiling of Rs 25 lakh per borrower.
Assocham wanted fresh lending to infrastructure to be brought within the ambit of priority sector lending.
While the monetary policy is a little more than a week away, experts do not see the prospects of a cut in the repo rate.