By IANS
New Delhi : Industry bodies have said hiking of cash reserve ratio (CRR) by Reserve Bank of India would reduce “lendable” resources of commercial banks.
Habil Khorakiwala, president, Federation of Indian Chambers of Commerce and Industry (Ficci), said that the increase in CRR would impact bank liquidity, leading to a reduction in the “lendable” resources of the banks. Khorakiwala hoped that banks would not raise interest rates that are already at high levels.
“While we do appreciate RBI’s predicament to control liquidity, any increase in lending rate would have a serious impact on corporate profitability,” Khorakiwala said.
The Confederation of Indian Industry (CII) said: “The hike in CRR would effectively suck out about Rs.155 billion from the system.”
CII maintained the RBI should have considered a cut in interest rate while raising the CRR, in line with the global trend.
It was required in view of the emerging indication of slowdown in the US economy, the apex industry body said.
CII wondered how the RBI would react in the eventuality of the US Federal Reserve cutting interest rates Wednesday. In case that happens, foreign fund flows into India will increase, it said.
The confederation said that if RBI had made a moderate cut in interest rate, concerns on foreign fund inflows would have been dealt with better.
Ficci’s Khorakiwala however welcomed RBI’s decision to keep bank rate and repo rates unchanged.
“The interest rate should be so set that they help exporters make good the losses that they are incurring on account of rupee appreciation,” the Ficci president said.
Indian exporters and small and medium businesses are unhappy, however.
Anil Bhardwaj, secretary general of Federation of Indian Micro, Small and Medium Enterprises, told IANS: “Small and medium businesses will bear the consequences of RBI’s move to raise CRR.”
He said that because of the reduction in liquidity, banks might become averse to lending to this segment, which is supposed to be a relatively risky group.
Vijay Kumar Agarwal, chairman of Apparel Export Promotion Council, told IANS: “We are disappointed because we were expecting a reduction in interest rates.”
Agarwal maintained that apparel exports have sharply declined due to high interest rates.
Noted trade analyst Arun Goyal said that RBI wanted to restrain the banking industry. “Interest rates will go up due to reduction in liquidity,” he pointed out.
He however said that this measure would help slow the appreciating rupee and contain inflation.
RBI governor Y. Venugopal Reddy left all key bank rates unchanged in the mid-term review of the monetary policy for financial year 2007-08 announced earlier Tuesday.
The bank rate at six percent, repo rate at 7.75 percent and reverse repo rate at six percent all remained the same.
The cash reserve ratio (CRR) was however hiked by 50 basis points to 7.5 percent with effect from Nov 10.