Assocham asks RBI to slash CRR, MSF rates by 0.5%
Oct 28 2013 , New Delhi
"Due to the ongoing festive season and forthcoming state elections, currency leakage from the banking system is likely to be around Rs 70,000 to 80,000 crore.
"In this context, the RBI could look at infusing Rs 700-800 billion liquidity through a combination of CRR cuts (0.5 per cent) and Open Market Operations purchases," Assocham President Rana Kapoor said in a statement today.
CRR is the the mandatory portion of cash banks have to park with the RBI whereas marginal standing facility (MSF) rate is the rate at which banks borrow from it.
Currently, he said, the spread between the repo and marginal standing facility (MSF) rates is 1.5 per cent, higher than the usual spread of 1 per cent. The spread needs to be normalised to 1 per cent by reducing MSF rate further.
This will constrain money market liquidity further and limit smooth flow of credit to productive sectors of the economy, Kapoor said.
Kapoor also elaborated on the recommendations to revive investments particularly aimed at boosting the infrastructure sector.
"To revive infrastructure growth momentum, fresh lending to the sector should be classified as priority sector lending. Given the strategic importance of the Defense sector, inclusion of Shipping, Shipyards, and other such important supporting segments should be classified under the definition of infrastructure," Kapoor suggested.
Large cash-rich PSUs should be allowed to participate in investments in investments by auctioning projects, post necessary due diligence, that are delayed on account of financial competency constraint of project sponsor, he said.
Kapoor aslo suggested creation of a framework for developing a liquid municipal bond market in India to fund urban infrastructure.
Speaking about making Mumbai as financial capital, Kapoor said: "well established International Financial Centres like New York and London have grown, complementing growth of their home economies. More recently, Singapore, Hong Kong, and Dubai have also emerged as IFCs attracting MNCs from various sectors."
Meanwhile, Reserve Bank Governor Raghuram Rajan today hinted at increasing the key rate at the second quarter monetary policy review tomorrow, citing urgency to anchor inflationary expectations.
An RBI study of professional forecasters said the average WPI inflation will climb up to 6 per cent from the earlier median expectation of 5.3 per cent, while on the growth front, they reduced the projection for the current fiscal to 4.8 per cent from 5.7 per cent earlier.