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RBI hits pause button: Demand revival key, says industry bodies

Source: PTI
December 05, 2019 19:46 IST

Reversal in the declining economic growth trajectory is clearly the need of the hour and all steps should be taken to bring about this change.

Expressing disappointment at the RBI's decision to keep interest rates unchanged, industry body Ficci on Thursday said there is a need for continued action on the policy rate front to boost growth.

Meanwhile, Assocham said accommodative stance on policy is understandable as long as banks are nudged to pass on the rate cut benefits to customers.

 

RBI has given an adequate approach to the accommodative stance of monetary policy in the era where lot of developmental activities are on the move and thrust of the government is to create demand in the economy, PHD Chamber said.

The Reserve Bank on Thursday unexpectedly hit the pause button on cutting interest rates as it gave more importance to prevailing inflation pressure and rising food prices over a worrying slowdown in the economy.

After five consecutive rate cuts this year, the six-member Monetary Policy Committee (MPC), headed by RBI Governor Shaktikanta Das, unanimously voted to hold the key repo rate at 5.15 per cent and reverse repo rate at 4.90 per cent.

"The RBI has left the repo rate unchanged in today's announcement. This is contrary to what FICCI was expecting given the weakening growth scenario in the economy.

“We note with concern that the transmission of the earlier policy rate cuts has not happened adequately, and are disappointed with the decision to not cut the repo rate as there is need for continued action on the policy rate front," Ficci president Sandip Somany said in a statement.

He said a reversal in the declining economic growth trajectory is clearly the need of the hour and all steps should be taken to bring about this change.

"A cut in the policy rate was also important for boosting the sentiment in the market and amongst investors, and FICCI was hoping for a bolder action on this front.

“In fact, we feel that a further cut of 75 to 100 basis points in the repo rate is required in a short period of time to strengthen growth in the economy," he added.

Assocham president B K Goenka said, "A temporary pause by the RBI to the policy interest rate reduction cycle while keeping its stance accommodative is understandable as long as it keeps nudging the banks to significantly pass the benefits of earlier rate combined repo rate cuts of 135 basis points since February this year."

While inflation control remains the mandate of the RBI, balancing the target with growth is equally important, Goenka said, adding the focus should majorly be directed towards demand revival.

While the government does seem to be doing the heavy lifting, revival of consumer confidence would do the trick, he said.

"Sectors like real estate and construction can really lift the sentiment, making it imperative for the stress fund of Rs 25,000 crore to be made functional for the sector.

“Besides, improved outlook in agriculture should also help the economy bottom out faster," he added.

At least 25 basis points cut was expected from the RBI to enhance the liquidity in the system and support demand in the economy, Assocham said.

"At this juncture, the full transmission of the earlier policy rate cuts by the banking sector in terms of reduced lending rates would be crucial to boost liquidity, induce demand and industrial growth in the country.

"Going ahead, we look forward to the continued softer stance of monetary policy to help revive demand, enhance sentiment for investments and expanding production capacities," said D K Aggarwal, president, PHD Chamber of Commerce and Industry.

The Reserve Bank has also cut the economic growth projection to 5 per cent for the current fiscal from 6.1 per cent earlier, on the back of weak domestic and external demand.

With the growth projection for the current year being revised down, both government and the central bank should initiate some stronger measures to break the logjam particularly in the stressed sectors of the economy, Somany said.

"There has been some active consultation between industry and government, and we expect that between now and the next Union Budget some of the additional measures suggested by the industry will be implemented," he added.

Goenka said the economy needs a major demand push which can be greatly generated by much higher credit growth which remains dismal.

"Besides, a coordinated approach with the government to prim up the GDP growth, as underscored by RBI Governor Das, is equally appreciable," he noted.

Photograph: Reuters

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