The IMC Chamber of Commerce and Industry overall lauds the third Credit Policy of 2016-17 announced by the Reserve Bank of India today
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Dear Members:

The Policy clearly recognizes that Industrial Production as well as Services sector including exports has shown a clear pickup in the last few months, though Investment activity has been lagging. It is all the more creditable that this uptick has happened in a global context where events like Brexit and the possibility of Federal Reserve hiking rates have been keeping a lot of markets like Japan, China and Emerging markets on the edge.

The main concern for SMEs is the cost of money. This change is in the right direction, but it needs to get even better.

The IMC notes that the biggest change in the past few months has been the stance on liquidity infusion by the Reserve Bank of India through its Open Market Operations as well as by the Government front loading its expenditure that have been instrumental in infusing liquidity into the markets. In particular, the INR 805 bio of open market purchases of bonds by the RBI and the Government spending close to 60% of its full year deficit has clearly helped to trigger the fall in bond yields with ten year benchmark yields falling about 25 basis points in the past few months, followed by similar falls in commercial papers and debenture yields too. This augurs well for the corporates who access these markets and will see relief in their interest costs. It is also laudable that the RBI has chosen to not react negatively to the uptick in inflation to around 5.78% backed by pulses and food inflation. They continue to see the Q4 fiscal 2016-17 inflation at 5% though with some small upside risks.

The fact that the monsoons have been 3% above the Long Period Average and also the fact that the area under cultivation has surged hold out promise for food inflation to come off. We also note with comfort that the 7th pay commission implementation which could have been mildly inflationary is being recognized as transitory and could be seen through. Overall, we believe that given the upward trajectory of inflation in recent months, the policy rate cut was possibly not possible this time, but provision of liquidity and further promise of liquidity infusion in future, keeps the space for further cuts in policy rates.

A nervous market which has been wondering about how to tackle the USD 25 bio outflow of FCNRB deposits between September and November could take a lot of comfort from the RBI assurance, including announcement of another OMO on August 11 itself which could help banks reduce their investment books and redirect proceeds into lendings especially to the small sector.

However, IMC shares the RBI disappointment with the fact that the transmission of rate cuts by the banking system has not been proportionate to the policy cuts. The SME sector in particular, which does not access the bond markets, thus is primarily dependent on banking system would welcome rate cuts of a deeper sort. The assurance that the MCLR formulas and calculations are being further looked at holds out promise and we hope that we see further meaningful cuts in the rates for the SME sector. We would also urge that refinance windows at concessional rates could be opened to banks to fund the SME sector, administered through institutions like SIDBI, which would accelerate the flow of funds at lower rates to this sector, which is the bedrock of manufacturing in the country. This is again important as the GST regulations draw all these institutions into a national framework, we need to ensure that they benefit from lower costs of funds to the same extent that larger corporates do.

We also note with comfort that the process of institutionalizing the rate policy has gathered steam and the MPC is being set up and a target of 4% plus / minus 2% has been given, which could give the RBI the necessary tools to be flexible in the inflation targeting process, and cut rates where necessary to prod growth further.

Overall, a good policy under the circumstances, but we hope for further steps to enhance the process of lowering cost of funds to the small and medium sector through better rate transmission as well as through dedicated pools of refinance to banks to onlend to the SME sector.

With kind regards,

Mr. Deepak Premnarayen
President, IMC Chamber of Commerce and Industry