New Delhi: India Inc. Tuesday welcomed the Reserve Bank of India`s (RBI) move to put more funds into the system by cutting statutory liquidity ratio (SLR). However, it said that interest rate cut should also be considered when inflation is slowing down and growth needs a boost.
"At a time when industrial growth continues to be sluggish, Consumer Price Index (CPI) based inflation is moderating and above all, inflation risks are gradually abating due to improvement in monsoon conditions, the RBI could have taken this opportunity to effect a cut in interest rates," said Chandrajit Banerjee, director general, Confederation of Indian Industry (CII).
According to CII, the high cost of capital has been dissuading industry from undertaking capacity expansion and is causing financial stress among firms where demand is credit driven.
The Federation of Indian Chambers of Commerce and Industry (FICCI) said that statement by the RBI re-affirms that the economy is on the mend.
"The cut in SLR should help augment liquidity in the system. We hope this move is followed by a downward movement in the cost of capital for the industrial sector," said Sidharth Birla, president, FICCI.
On the inflation front, the industry lobby said that steps taken by the central government to manage food inflation should be followed up with close coordination with the states to ensure that their mitigating impact is seen at the earliest.
The RBI left key interest rates unchanged in its third bi-monthly monetary policy review Tuesday.
The status quo in key policy rates would mean that the sectors like realty, automobile and other capital intensive industries will not get any relief from the high interest cost prevailing in the country to contain inflation.
Governor Raghuram Rajan in his policy statement said that the RBI will continue to closely monitor inflation developments, and remains committed to the disinflationary path of taking Consumer Price Index (CPI) inflation to 8 percent by January 2015 and 6 percent by January 2016.
"While inflation at around 8 per cent in early 2015 seems likely, it is critical that the disinflationary process is sustained over the medium-term," the governor said.
The repo rate, or the interest that banks pay when they borrow money from the RBI to meet their short-term fund requirements, has been left unchanged at 8 percent.
The reverse repo rate, or the interest that the RBI pays to commercial banks when they park their surplus short-term funds with the central bank, has been adjusted to 7 percent.
The Cash Reserve Ratio (CRR) is left unchanged at 4 percent. The marginal standing facility rate and the Bank Rate is also kept unchanged at 9 percent.
The statutory liquidity ratio (SLR), the mandatory amount of bonds lenders must keep with the RBI, was cut by 0.5 percent to 22.0 percent of their net demand and time liabilities (NDTL) with effect from August 9, 2014.
The central bank`s action is on the expected lines as most analysts predicted a status quo, considering the macro-economic situation and current data.