‘Central bank missed an opportunity to boost consumption’
“Weak demand has been the key pain point for businesses and all levers need to be used to get consumption back on track. Front loading at least another 25 bps [basis points] cut in the repo rate would have been well timed,” FICCI president Sangita Reddy said. One basis point is one-hundredth of a percentage point.Updated: Aug 07, 2020 06:58 IST
The Federation of Indian Chambers of Commerce and Industry (FICCI) said the Reserve Bank of India’s (RBI) on Thursday missed an opportunity to cut policy rate at a time when the economy needed a strong boost to spur consumption and banks are risk averse.
“Weak demand has been the key pain point for businesses and all levers need to be used to get consumption back on track. Front loading at least another 25 bps [basis points] cut in the repo rate would have been well timed,” FICCI president Sangita Reddy said. One basis point is one-hundredth of a percentage point.
“The festive season has already set in and a cut in the repo rate would have given some guidance to businesses and consumers,” she added adding Reddy that the RBI’s decision to hold the policy rate could have been triggered by a spurt in inflationary pressure. The headline inflation was at 6.1% in the provisional estimates for June 2020, which is marginally outside the RBI’s comfort zone.
She, however, said that the inflationary pressure could be temporary. Much of the stress in prices was on account of food led by lockdown-induced supply side distortions, she said. “Going ahead, as these constraints ease, the pressure on prices will subside and be back on RBI’s indicative trajectory,” she added.
The RBI had already reduced its key interest rate by 115 basis points since March this year, but the consumer is yet to get its full benefit. Reddy said there has certainly been an improvement in the transmission of the past rate cuts, but “the feedback we have received from ground indicates that banks continue to remain risk averse”. “We would urge the banks to extend a lending arm in letter and spirit. Given that a sense of uncertainty continues to prevail for businesses, a comforting approach by the banks at this juncture is extremely critical.” Reddy also appreciated other monetary policy announcements such as debt restructuring, a framework to minimise regional disparities and expanding priority sector lending to startups and renewables.
Uday Kotak, president of the Confederation of Indian Industry said, “Given that the RBI has already reduced the repo rate significantly leading to increased liquidity, the decision to keep the rate unchanged at 4% today is understandable.” Experts say that RBI’s decision to keep policy rates unchanged was not unexpected. Industry experts hope that repo rate will be cut in future as inflationary pressures ease.