New Delhi, Oct.20 : The Confederation of Indian Industry (CII) has welcomed the Reserve Bank of India's decision to cut the repo rate by 100 base points to bring it down to eight percent.
Director General of CII Chandrajit Banerjee described the announcement as a step in the right direction.
"We are thankful to the RBI Governor for agreeing to this suggestion made by CII in view of the credit crisis that was starting to manifest in the Indian system, following the global liquidity crunch," he said.
A CII statement said that the credit crunch that has been visible in India of late has been the result of the twin problem of lack of liquidity in the system and the cost of credit owing to the steep interest rates.
In the last one week the RBI and the Government have responded to the situation by injecting additional liquidity to the tune of Rs I,25,000 crores and also now cutting interest (repo) rate.
Going forward a few more measures could to be considered by the government and the RBI and CII has made a detailed representation on this said the CII release. CII's key recommendations in this context include the following:
.The CRR needs to be brought down to 5 percent from the existing 6.5 percent. This implies another 150 bps reduction in CRR.
A dollar fund needs to be created out of India's forex reserves, which could be worth about USD 7 - 8 billion. This fund would be useful in buying Indian assets and thereby creating stability and liquidity in the markets.
-Another Rupee fund needs to be created with contributions from the RBI, the government and participating banks, with a corpus of upto Rs 30000 - 40000 crores, which could be parked with a body like to LIC and be used to inject momentum in the Indian stock markets.
-Specific liquidity lines need to be provided to banks and NBFCs that are currently not getting liquidity under LAF due to lack of government securities.
-A separate corpus needs to be created for lending to SMEs, as they stand to get disproportionately hurt by the non-availability of credit.
-The Ministry of Finance and the RBI could set up a SPV which would have to ensure that SMEs are allowed credit at close to PLR rates.