THE midterm review of the annual monetary policy announced by the RBI on Tuesday is on expected lines, according to industry associations. Keeping in mind the international trends in interest rates and particularly the indications coming in from the US, industry associations feel the RBI could have considered an interest rate cut along with the CRR hike of 50 bps.
They observed that the hike in CRR would effectively suck out about Rs 15,500 crore from the system. Any increase in lending rate further would have a serious impact on the corporate profitability. This is already evident from a slowdown of several sectors. These sectors are cotton, textiles, transport equipment, leather products. These are the sectors, which are either having predominance of SMEs or are significantly dependent on the bank credits for consumer loans.
Sunil Bharti Mittal, president, Confederation of Indian Industry, said: “It’s not clear how the RBI would react in the eventuality of the US Federal Reserve cutting interest rates, since another round of interest rate cuts would increase the flow of foreign funds into India through the ECB route, which would obviously add to the concern of the RBI.”
It is felt this challenge of increased foreign exchange inflow would further get accentuated and consequent pressure on the rupee by expanding the interest rate differentials between India and the US.
The RBI announcement has allowed oil companies to hedge foreign exchange exposures by using over-the-counter (OTC) exchange traded derivatives up to a maximum of one year forward. Many see this is as an opportunity, which India could have leveraged by developing currency exchanges to facilitate such hedging, said the release.