Reserve Bank’s monetary steps will slow economic growth: Industry

July 29th, 2008 - 6:07 pm ICT by IANS  


New Delhi, July 29 (IANS) The hike in the cash reserve ratio (CRR) and repo rate could slow economic growth further and make credit more costly, India Inc. said Tuesday. “The tightening of the money supply may lead to a fall in the overall business confidence with companies postponing their investment plans,” Sajjan Jindal, president of industry lobby Associated Chambers of Commerce and Industry of India (Assocham) said.

In the quarterly review of the monetary policy for this fiscal, the Reserve Bank of India (RBI) Tuesday raised the repo rate, or the short-term lending rate, and the cash reserve ratio (CRR), respectively by 50 basis points and 25 basis points.

The repo rate stands revised for the third time in three months to nine percent, while the CRR will also be hiked to nine percent from the fortnight beginning Aug 30, 2008, the Reserve Bank said in a statement.

“With foreign exchange reserves declining, which has reduced the overall money supply in the system, a further hike in the interest rates could decelerate growth,” Jindal said.

“In a short span of about three months, the RBI has hiked the CRR to a level of nine percent, which may result in further reduction of liquidity from the banking system to the extent of Rs.200 billion”, the PHD Chamber of Commerce said.

It said following the RBI’s move, commercial banks were bound to further raise the prime lending rates (PLR), making credit more costly for the industry and trade.

PLRs of state-owned and private sector banks have increased to 12.75-14 percent and 13.5-17.25 percent from 12.25-13.5 percent and 13-16.5 percent in March due to the RBI measures.

This was impacting growth of industry, the corporate sector’s financial situation, capacity utilization, profit margins and employment, chamber president L.K. Malhotra said.

Industrial output growth that slowed to five percent during April-May, as compared to 10.9 percent in the same period last year, could decline further. This is bound to slow down economic growth, he said.

According to US-based investment bank Goldman Sachs, the hike in the repo rate and CRR was expected.

“The central bank may go for another hike of 25 basis points in repo rate and CRR by October end,” it said in a statement.

“The tightening will not only slow down investment demands but will also slow down industrial growth. The impact of this tightening will be reflected more specifically in financial year 2010,” Goldman Sachs predicted.

Indian Overseas Bank (IOB) chairman and managing director S.A. Bhat said his bank was losing around Rs.120 million per month on account of the RBI’s credit policy.

The latest increase in the CRR would suck out around Rs.3 billion from the IOB, leading to revenue loss, Bhat told IANS.

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