The new Governor’s maiden monetary policy announcement has come at a time when the economy is facing multiple challenges, including low growth, high inflation and a depreciating currency.

Setting monetary policy in this environment has been extremely complicated and industry welcomes the pragmatic approach taken by the Governor. In particular, the 75 basis points reduction in the MSF (Marginal Standing Facility) rate is welcome; this had been raised earlier to contain the rupee volatility.

However, industry is disappointed that the RBI simultaneously raised the repo rate by 25 basis points. The RBI has explained these actions as a combination of cautious unwinding of the extraordinary measures imposed earlier, together with bringing back the repo rate as the operational policy interest rate. However, at a time when the economy has slowed down sharply with little signs of a recovery, the increase in the repo rate, which is considered a signal for economic activity, could have been avoided. It is hoped that the reduction in the MSF rate will bring down the cost of funds for banks, which they can pass on to customers.

There is a sense of relief that the rupee has stabilised to a great extent. This can be attributed to measures taken by the RBI which has led to an increased inflow of NRI deposits. Of course, the US Federal Reserve’s decision to continue with quantitative easing has also helped, but this should be viewed as a temporary window to improve our fundamentals. The rise in the current account and fiscal deficits has been a cause for concern. If this is not contained, we may again face an attack on our currency.

What is urgently required is an improvement in our external competitiveness so that we can increase our share in global exports and reduce dependence on imports. A country as large as India needs to have a strong industrial base that can cater to domestic and external demand.

Industry is keen to take on the challenge, but is hampered by various constraints such as lack of infrastructure and high transaction costs. It is important for the Government to address supply-side bottlenecks.

As for the RBI, it must recognise that the high cost and the poor availability of funds is hampering growth, especially for the small and medium sectors. In this context, the central bank’s renewed focus on improving the country’s financial infrastructure and working towards greater financial inclusion is heartening.

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(The author is Director-General, CII.)

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