Hike in CRR and repo rate will depress growth and hurt small businesses: PHD Chamber

Dr. L K Malhotra, President, PHD Chamber has expressed concern over RBI announcing for the fourth time during this year an increase in CRR. On 11 June RBI raised the key lending rate by a quarter of a percentage point to 8%. In April, it raised banks’ CRR by 75 basis points in stages, with a view to check the rising inflation and dampen consumer demand. The RBI’s latest move has raised the key lending rate by half a percentage point to 8.5% and enhanced the quantum of reserves commercial banks need to keep with them by raising the CRR to 8.75% in two stages on 5 July and 19 July 2008.

The two phase CRR hike is expected to suck out huge liquidity, estimated to be around 19,000 crore of credit from the system, thereby tightening liquidity. This move, according to PHD Chamber President would adversely affect availability of credit to all sectors of the economy. The small scale sector might be most adversely hit. Its share of about 6 percent in gross bank credit might drop further as the reducing profit margins of the scheduled commercial banks would compel them to increase interest rates further. This is bound to temper demand for loans and adversely impact investments as well as consumption. Growth in the manufacturing sector which dropped to 9.1% during 2007-08 as compared to 12.2% during 2006-07 might see a further dip due to decline in demand on account of expected higher interest rates on loans for automobiles and consumer durables.

Higher interest rates may further push the cost of various infrastructure projects which are facing the heat of high cement and steel prices.

At a time when it is well recognized that the prevailing high inflation rate is primarily on account of supply side factors, at national as well as international level, due to globally high commodity and fuel oil prices and the lowest levels of world’s food stocks in 25 years, these monetary measures might not bring the desired results and might fail to adequately help in containing inflation while maintaining the momentum of growth.

According to PHD Chamber, the latest move of the RBI does not adequately focus on pushing investments for growth and improving the supply side. It is feared that RBI’s measures to tackle inflation by sucking huge liquidity from banking system might trip economic expansion and hamper the realization of projected GDP growth of 8.5% for 2008-09.