FICCI has asked RBI to reconsider its monetary policy stance

Just before the RBI’s monetary policy review, the Federation of Indian Chambers of Commerce and Industry (FICCI) has urged the RBI not to raise interest rates any further as such a move would affect business sentiment adversely, slow down the pace of investments further and hit economic growth. On the other hand, it requested the RBI to amend its monetary policy and cease from raising key policy rates further.

In a communication to the RBI Governor D Subbarao, Chairman of FICCI Finance Committee, Udayan Bose said “Over the last two years, food inflation has remained at elevated levels. Although it is now trending downwards, it is still high and therefore a cause for concern. We have seen the central bank taking swift measures, with key policy rates being hiked nine times since March 2010, to rein in inflationary pressures. “However, food inflation has proved to be stubbornly insensitive to any such moves. As this is largely a problem arising out of demand-supply mismatch, any move to control such inflation through monetary moves has been futile. On the contrary, aggressive monetary tightening is having an adverse bearing on economic and industrial growth of the country.”

FCCI pointed out that the number for GDP expansion in the last quarter of 2010-11 confirmed the slowdown in sectors such as manufacturing and mining. Another worrisome trend is the slowdown in growth of gross fixed capital formation. Udayan Bose said “The pace of investments, as you would agree, is a key determining factor for overall growth, and once it loses momentum, it is difficult to bring it back.”

The moral of Indian corporate is low, due to recent slowdown in the growth of cement sales, dip in import of steel, fewer queries related to purchase of commercial vehicles, increasing inventories with automobile dealers, and limited inquiries in the real estate sector. The business world is seeking clear direction and indications that highlights growth enhancing measures.

From March 2010, RBI has increased its policy rates for nine times. On May 3, RBI increased its policy rate by 50 basis points. In this mid-term policy review, RBI is expected to increase its policy rates by 25 basis points.

FICCI has requested the Apex bank to reconsider its monetary stance as any further tightening of monetary policy will further destabilize industrial growth, weaken GDP growth and limit employment generation. Udayan Bose said “Such a situation would have social repercussions as well, for we need to generate close to 12 million jobs annually and a large part of it has to come from industry particularly the SME sector”. Single-mindedly pursuing a policy of interest rate hike could bring us closer to such a situation, which we must avoid at all costs. This is all the more important at a time when the global economy is still not completely out of the woods and there is a real danger of another slowdown,”