Assocham recommends reduction in CRR

New Delhi, Jan 29: Amid expectations of tightening of the monetary policy by the RBI to control rising inflation, industry body Assocham has strongly recommended reduction in cash reserve ratio (CRR), status quo in prime lending rates and permitting market forces to prevail.

The chamber said instead of using measures like CRR and SLR, to soften the inflationary pressures, the government should undertake steps to increase the production capacity of the economy. Measures should also encompass the removal of existing supply bottlenecks in agriculture and infrastructure sector.

''Rising CRR and interest rate will have a negative impact on the economy in longer run, resulting in escalating project costs, which will lead to mismatch between supply and demand for commodities...

This will cause further inflationary pressures,'' Assocham President Venugopal N Dhoot said.

''In view of this, reversal of the RBI's strong bias for higher interest is the most obvious measure to ease the situation, in the face of impending global growth slowdown, moderation of inflation and unwinding of international liquidity overhang.'' Mr Dhoot observed that tight monetary measures, undertaken by the RBI in response to the potential overheating of the economy, has increased the borrowing cost for corporates as banks are forced to increase the lending rate.

For keeping the country on the path of high GDP growth, stable and soft interest rate regime need to be maintained, he said.

A modern financial sector should be developed so that there is efficiency in the capital allocation to meet the social objectives.

The CRR has already been raised in two phases by 50 basis points to 5.50 per cent.

''Any further rise in CRR would adversely affect industrial, economic and GDP growth as lesser funds would be available for productive purposes. The housing sector and consumer durable sector will, in particular, be negatively affected by this rise in CRR,'' Mr Dhoot said.

It will also impact fixed capital investment and the profit margins of small and medium corporate bodies, negatively affecting earnings per share, he added.

The chamber also demanded allowing long-term collective investment vehicles, such as pension funds and insurance companies, to effectively participate in the equity market.

UNI