Business

Assocham for cut in CRR, repo rate

NEW DELHI: The Associated Chambers of Commerce and Industry of India (Assocham) has suggested that to inject enough liquidity in to the market, the Reserve Bank of India (RBI) should reduce the CRR (cash reserve ratio) and the repo rate by one percentage point, allow banks to borrow against government securities and provide dollars directly to oil companies for purchasing crude oil.

In its recommendations submitted to the RBI Governor, Assocham President Sajjan Jindal pointed out that several companies were now looking for rupee funding owing to the uncertainty in dollar within the RBI-approved spreads. It suggested that for future planning, instead of squeezing credit which would have a serious impact on the survival of the industry, the level of credit should be redefined taking the base effect into account. Giving its suggestions for the credit policy to be unveiled later this month, the chamber noted that the RBI should reduce by one percentage point both the mandatory deposits that banks have to park with the apex bank (CRR) as well as the rate (repo) at which banks can borrow from it. Such a step, it said, would release enough liquidity into the system to enable corporates to borrow to facilitate capacity expansion plans.

The RBI, the chamber said, should usher in a new credit era in which oil companies are directly provided U.S. dollars in advance to help them hedge their crude oil purchases in a smooth manner. At present, oil companies obtain dollars through different market channels.

Alongside, commercial banks should be permitted to borrow against government securities for increased credibility. These measures, Assocham said, have become necessary to help industry come out of the liquidity crunch. At present, the cost of borrowing is high at about 25-28 per cent and as a result, the industry’s margins have already shrunk, the chamber said. In its representation, the chamber pointed out that price and supply conditions might get worse if the RBI resorted to a hike in interest rate to control inflation as the move would not only hurt the industry but also the consumers. It noted that higher interest rates or tightening of liquidity through a hike in the CRR would be of no use as the problem was not in the quantum funds floating in the economy but in the shortage of goods, particularly food and metals owing to global scarcity and the consequent speculative activities.

In such a scenario, the chamber said that the Government and the RBI should adopt a two-pronged strategy. In the long-term, they should adopt measures to boost farm production and divert resources towards higher productivity. As a short-term measure, the Government should concentrate on strengthening the public distribution system (PDS).

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