Assocham Calls For Cutting CRR, SLR to Inject Liquidity In Money Market.

Industry body Assocham today urged the Reserve Bank of India (RBI) to reduce cash reserve ratio (CRR) and statutory liquidity ratio (SLR) amid large liquidity crisis in the money market and rising demand for easing monetary conditions to curb stubbornly high inflation.

Instead of reducing repo rates, there is a strong case for the central bank to cut CRR by 50 basis points from 6%. This will release about Rs 300 billion into the system, said The Associated Chambers of Commerce and Industry of India (Assocham) ahead of the RBI`s third mid-term quarterly review on December 16.

Banks currently continue to withdraw from the RBI`s repo window to cope up with growing shortage of funds, said secretary general D.S. Rawat. ``Slashing CRR will improve the profitability of banks and enable them to pass on more funds to theindustry.``

The central bank should also consider lowering SLR by 1 - 2% to ensure that funds flow at reasonable cost to the infrastructure sector, he said. This will give impetus to the fund-starved sector which is facing huge challenges.

With economic growth slowing and the threat of contagion from Europe strengthening, there should be some monetary action, said Rawat. Moreover, liquidity in the system is under stress with banks borrowing substantially more from the liquidity adjustment facility (LAF) of RBI than what it desires.

Banks have been drawing an average of Rs 1,000 billion daily since November 24 using the LAF window at 8.5% repo rate. The regulator`s comfort level is 1% of net demand and time liabilities which is about Rs 600 billion.

The mid-year economic review projects a slashed-down growth rate of between 7.5 and 7.25% for the current year, down from the budget projection of nine% or more.

Along with this, the trade deficit is projected to balloon to between 155 billion to 160 billion dollars. ``Funding current account deficit will surely be a problem as this was being comfortably met so far from capital inflows. The fiscal deficit is also shooting with government revenues rising by seven% and expenditure going up by 10%,`` said Rawat.

The rupee is depreciating as funds flow from overseas has abated because of global uncertainty. This will further fuel domestic inflation as India is import dependent country and chronically imports more than it exports. ``On the whole, a rather bleak economic situation and prospects for 2012,`` he said.

The economy has been experiencing a slowdown with GDP growth dipping to 6.9% in the second quarter, the lowest rate of expansion in over two years. The eight key infrastructure industries witnessed dismal growth of 0.1% in October, the lowest in the past five years.   

Headline inflation, which also factors in manufactured items, has been above the 9% mark since December 2010. The RBI has hiked interest rates 13 times since March 2010 to tame demand and curb inflation.

In its second quarterly review of the monetary policy last month, the central bank had said it expects inflation to remain elevated till December on account of the demand-supply mismatch before moderating to seven% by March 2012.

``There is a strong case for RBI to bring down interest rate so that it gives some relief to the industry which has seen slowed demand and rising input costs,`` said Rawat.

Source : myiris.com