In its recommendations for the mid-term review of Monetary Policy 2007-08, CII expressed concern over high interest rates affecting investments and growth and suggested that the time is right to recognize the need to reduce interest rates, which is pivotal to sustain 9% plus GDP growth.
The RBI had introduced tight monetary measures to control inflation and liquidity conditions in the economy. With inflation at less than the lower limit of RBI's tolerance levels of 4 to 4.5% in the medium term and given the strong macro economic conditions, it is time to review the tight monetary policy regime, said CII.
Inflation is under control and has declined to 3.23% for the week ending 15 September 2007. However, Bank credit has declined from a high of about 33% in June 2006 to about 23 % in August 2007.
RBI's efforts to manage liquidity seemed to have worked. However, this has had a lagged impact on the Industrial output. IIP growth declined in July 2007 to 7.1% from 13.2% in July 2006.
A CEOs snap poll conducted by CII revealed that high interest rates are a cause for concern and majority of the CEOs expect that the Interest rates should be reduced to encourage greater investment rates. The CII CEOs snap poll revealed that 69 percent of the CEOs expected the interest rates to be lowered to about 12% (PLR) from the current level of 13.25%.
India would need investment rates in excess of 36 percent of GDP to achieve 10% GDP growth in the medium term, which is important to increase per capita income and reduce income inequalities.
Moreover, the appreciating rupee has also had an impact on the profit margins of exporters as well as SMEs. According to the CII's 19th Business Outlook Survey, for Micro Small & Medium Enterprises, 71 % of the respondents expected a negative impact on their bottomlines due to surging value of the Rupee vis-à-vis the US Dollar.
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