RBI's Raghuram Rajan should have cut interest rate to revive growth: India Inc

Written by PTI | New Delhi | Updated: Apr 2 2014, 01:28am hrs
RBIRaghuram Rajan had the opportunity to reinvigorate growth by reducing policy interest rates: India Inc PTI
Disappointed with Governor Also read: Raghuram Rajan-led Reserve Bank of India's (RBI) decision to hold a key interest rate, India Inc today said the apex bank should have cut the repo rate to catalyse demand and induce investments while inflation is on a downward trajectory.

Emphasising that revival of growth should be the number one priority of the RBI at this time, industry groups said apprehensions about inflation rearing its head again may prove to be misplaced.

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Also Read: Monetary policy review: Guv Raghuram Rajan delivers no surprises, holds interest rates

"At a time when growth impulses remain weak and WPI inflation has been on the declining trajectory, the RBI should have taken this opportunity to announce a cut in policy rates, which would stimulate demand and kick-start the investment cycle," CII Director General Chandrajit Banerjee said.

The Reserve Bank today kept the key policy rate (repo) unchanged at 8 per cent, and the cash reserve ratio static at 4 per cent, saying retail inflation remains "sticky".

Also read: Raghuram Rajan's full speech

"Tweaking policy rates downwards would help lift business sentiments. We feel relying primarily on monetary policy for inflation management may not be a comprehensive approach. There are administrative fixes and fiscal measures that need to be adopted," Ficci President Sidharth Birla said.

The central bank also introduced steps to increase liquidity and contain volatility in the money market by halving the overnight call money rates and increasing the 7-day and 14-day repo limits.

"The RBI had the opportunity to give growth a chance to reinvigorate by reducing the policy interest rates and reviving the investor sentiment," Assocham President Rana Kapoor said.

Also Check: Macroeconomic and Monetary Developments 2014 (An Update)

If inflation continues along the glide path of reaching 8 per cent by January 2015 and 6 per cent by the year after, RBI Governor Raghuram Rajan said there won't be any rate hikes.

"The RBI status quo on policy rates is disappointing as the industrial growth is severely impacted by high cost of funds and other structural rigidities in the economic system like poor infrastructure and high transaction costs," said Sharad Jaipuria, President of the PHD Chamber.

"The exporting community was looking towards the RBI to reduce the policy interest rates. Thus, we are disappointed," EEPC India Chairman Anupam Shah said.

The RBI pegged GDP growth in 2014-15 at 5.5 per cent. It also said the current account deficit in FY14 would be about 2 per cent of GDP.

Meanwhile, knitwear exporters in Tirupur expressed the hope that with the cushion of the increased liquidity under 7-day and 14-day term repo rates, the banks would extend more credit to export sector especially to SMEs.

Reacting to the First Bi-monthly Monetary Policy statement for 2014-15 of RBI, A Shaktivel, President, Tirupur Exporters' Association said in a statement in Coimbatore that exporters were expecting a reduction in repo rate to further moderate

the retail inflation.

Stating that RBI has underlined the need to revitalise the export competitiveness due to sluggishness in exports, he said the positive growth observed in the knitwear sector will have to continue amidst global competition and the negative measure to the sector will affect the growth.

Varun Goel, Head PMS, Karvy Stock Broking Ltd on RBI's monetary policy:

RBI Governor Also read: Raghuram Rajan maintained the repo rate at 8% in todays policy. Despite the recent cool-off in headline inflation numbers, the future trend remains unpredictable. RBI has maintained its target of headline CPI at 8% by January 2015 and 6% by January 2016. We expect RBI to maintain status quo for some time to achieve these objectives as a significant drop in inflation appears unlikely in the short term. Food and vegetable prices seem to have bottomed out and we expect some uptick in those items in the coming months.

GDP growth in the last three quarters has remained below 5%. The slowdown is expected to have continued in fourth quarter also. RBI has pegged FY15 GDP growth estimate 5.5% with downside risks. The expectations of weak monsoons this year might depress agricultural growth while industrial activity stays muted.

The steady narrowing of the trade deficit over the year has shrunk the current account deficit (CAD) to 0.9 per cent of GDP in Q3 of 2013-14. For the year as a whole, the CAD is expected to be about 2.0 per cent of GDP versus 4.8% last year. This puts India into a relatively comfortable position compared to other emerging market peers given the uncertain external environment.