Credit Policy: Industry bodies give thumbs up

Leading industry associations welcomed the annual monetary and credit policy of the Reserve Bank of India (RBI). While initiatives like pre-payment of extra commercial borrowing (ECBs) without prior RBI approvals with a limit of $400 million, enhancing the overseas investment limit for Indian companies from 200 to 300% of their net worth were applauded, the associations felt that there was a need to adjust the recent hike in bank rate, reverse repo rate and repo rate.

The industry chambers have praised RBI for setting realistic target of controlling inflation rate at 4-5% and maintaining Gross Domestic Product (GDP) at 8.5%.

CII

With no upward increase in key rates and announcement that SMEs would be permitted to book forward contracts without underlying exposures or past records of exports and imports through authorized dealers with whom the SMEs have credit facilities, RBI could not have announced a more appropriate monetary policy, R Seshasayee, president, Confederation of Indian Industries (CII) said. CII was particularly appreciative of the measures, which indicate that RBI is keenly following the effect of rupee appreciation on exports.

Commenting on the macroeconomic targets set by the central bank, the forecast of 8.5% GDP growth for 2007-08 was welcomed. In this context, the increase in the target money supply to 17-17.5% is welcome, said Seshasayee. However, CII expressed concern about the compatibility of 4-5% inflation rate with high growth rate trajectory over the medium term, which India needs to aspire for. "We need to move to a system by which a more disaggregated approach is adopted for inflation monitoring and management."

FICCI

Apart form applauding the RBI on targeting controlled inflation rate upto 5 per cent, enhancing the overseas investment limit for Indian companies from 200 to 300 per cent of their net worth and limiting prepayment for ECBs, the Federation of Indian Chambers of Commerce and Industry (FICCI), has stated that his is in line with the recommendations of the Tarapore Committee on Capital Account Convertibility (CAC) and Percy Committee on IFC and clearly shows RBI’s willingness to move towards the CAC in a calibrated manner.

"RBI has finally taken cognizance of the needs of the middle class willing to buy their own homes by reducing risk weightage marginally on loans up to Rs 20 lakh", said Habil Khorakiwala, President, FICCI. The industry chamber hopes that the RBI will not take harsh measures as it had done in the past to hit credit growth, adversely impacting credit growth rate.

ASSOCHAM

Associated Chambers of Commerce and Industry of India (ASSOCHAM) has appreciated RBIs decisions of pre-payment of ECBs without prior RBI approvals with a limit of $ 400 million, increasing capital account transaction from $ 50,000 to $ 10,000 per financial year, and setting up of working group to tackle issues relating to interest rates, derivatives and facilitate the development of interest rate futures markets.

The industry lobby welcomed the realistic GDP target of 8.5% for 2007-08. The emphasis on price stability and aiming to contain the rate of inflation at 5% in the current fiscal, too, is welcoming. However the recent increase in bank rate, reverse repo rate and repo rate that leads to increase in the cost of money and cost of borrowing, are problematic according to the chamber.

PHDCCI

The PHD Chamber of Commerce (PHDCCI) welcomed RBI’s decision of no further change in the bank rate, reverse repo rate, repo rate and CRR. "Once the inflation rate is within manageable limits, RBI should take measures to soften the interest rate structure in the country", said Sanjay Bhatia, president, PHDCCI. The industry chamber also welcomed the overall instance of the monetary policy to maintain appropriate liquidity in the system to meet the legitimate credit requirements consistent with price and financial stability.

Reduction in the risk rate on residential housing loans to individuals for loans upto Rs 20 lakhs and increase in benchmark prime lending rates by 2-2.5% are applaudable decisions of the apex regulatory bank. Measures like flexibility for pre-payment of external commercial borrowing, enhancing the current or capital transaction limit for individuals by $50,000, increasing the limit of overseas investments by mutual funds are steps in the right direction to achieve the goal of full capital account convertibility, stated the chamber.

IACC

The Indo-American Chamber of Commerce (IACC) welcomed RBI's annual monetary and credit policy and said that "the steps contemplated in the policy will adequately address the inflationary pressure without adversely affecting growth impulses on the one hand and hardening of rupee on the other."

No increase in the repo rate, reverse repo rate, and bank rate is a great relief to the industry. However, increase in the scheduled banks can suck liquidity from the system making credit more costly. IACC believes that RBI has rightly reduced the money supply to a manageable level of over 17% which is critical to abate inflation.