Monetary policy. India Inc urges RBI to moderate pace of interest rates hikes

The Confederation of Indian Industry (CII) has urged the Reserve Bank of India (RBI) to moderate monetary tightening from the earlier 50 basis points, especially given the headwinds to domestic growth emanating from the global uncertainties.

This has been conveyed by CII to the central bank as part of its expectations for the upcoming monetary policy.

The domestic demand has been recovering as mirrored by the performance of host of high-frequency indicators, however, the prevailing global policy crisis is likely to impinge on India’s growth prospects too, said the CII in its submissions to RBI.

While CII is in cognisance of the fact that RBI’s interest rate hikes of 190 basis points so far this fiscal have been warranted to tame inflationary pressures, the corporate sector has now started to feel its adverse impact, the industry body said.

CII’s analysis of results for nearly 2,000 companies in the second quarter (July-Sept 2022) shows that both the top-line and bottom line has moderated on sequential and annual basis. Thus, moderation in pace of monetary tightening is the need of the hour.

However, given the sticky core inflation at around the 6 percent mark, the RBI could consider hiking the key interest rates by an additional 25 to 35 basis points to tame inflation, CII has suggested.

Notwithstanding the recent moderation in October 2022, the headline print continues to remain outside RBI’s target range for ten consecutive months. 

Further, with a yawning gap existing between credit and deposit growth, an additional rate hike will incentivise savers, thus providing an impetus to deposit growth and help narrow the Credit-Deposit wedge.  

Further, with rising global risk aversion adversely impacting the foreign capital inflows, CII stated that it poses challenges for the financing of the country’s current account deficit. 

“In fact, we need to keep a watch on capital flows across all the three buckets namely – foreign direct investment (FDI), NRI flows and foreign portfolio flows (FPI). High focus only on FPI numbers may not always provide a complete picture,” the CII said.

“The incipient signs of domestic recovery need to be preserved to help accelerate movement towards a normalised growth scenario. As in the past, the RBI should use all the weapons in its arsenal to ensure that while through its actions inflationary expectations are well anchored, it should in no way muzzle the growth impulses”.

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