Mixed reactions on RBI Repo Rate & CRR hike from Industry Associations
Monetary Policy Measures Reflect Inflation Concerns: CII
Reacting to the increase in the repo rate and cash reserve ratio, CII stated that these are expected policy responses to inflation, though it may have been possible to await the lagged effects of the last round of monetary actions in June 2008 before taking these further steps. While there could be a concern on the impact of continuing monetary tightening on investment and growth, the RBI has made it clear that at the present juncture controlling inflation is its priority.
CII fully appreciates the dilemma that the government and RBI are faced with vis-a-is the need to contain high inflation and the need to drive growth, especially given the fact that a large part of the current inflationary pressures are due to global commodity prices whose impact it is difficult for the policy makers to control. CII welcomes the RBI's target of WPI inflation being around 7% by March 2009.
Concerns about sustaining growth in the environment of monetary tightening remain. Recent industrial growth numbers point to a moderation in the growth momentum. However, CII surveys have shown that industry's sentiment towards investment is still strong. Many sectors are operating at close to full capacity and are therefore planning capacity expansions. Such capacity expansions would fuel investment demand and keep the growth momentum strong.
Increase in interest rates could impact the investment momentum and corporate cash flows. The future trends in corporate profitability and execution of the investment pipeline would need to be monitored in this context.
CRR, repo rate hike could dampen the economic growth : ASSOCHAM
The hike in the cash reserve ratio and repo rate by 25 basis points and 50 basis points respectively to combat the inflationary pressures could further underpin the slowdown in the economic growth.
Mr. Sajjan Jindal, President, ASSOCHAM, reacting on the hike in the interest rates said, “the tightening of the money supply may lead to a fall in the overall business confidence with companies postponing their investment plans in the time to come”.
With decline in the forex reserves recently, which has reduced the overall money supply in the system, a further hike in the interest rates could decelerate the situation further, further said Mr. Jindal.
As the current inflation is due to the supply crunch hitting globally, the hike in the policy rates may not be able to scale down the impact of rising prices. It is thus necessary to address to the supply side inefficiencies so as to bring down the rising prices to the Central Bank comfort zone.
Short-term costs but medium-term benefits, says Crisil
Full Text of First Quarter Review of RBI's Annual Policy Statement 2008-09
Highlights of First Quarter Review of its Annual Policy Statement 2007-08
Macroeconomic and Monetary Developments: First Quarter 2008-09
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