Furthermore, following the rate cut by the US Federal Reserve by 50 basis points will provide greater interest rate arbitrage opportunities and would trigger greater foreign investment inflows in the economy.
FII inflows in the last seven months have already touched US $ 7 billion. While the RBI has been engaged in sterilizing the rupee, reducing the interest rates could be of help to exporters especially smaller exporters in reducing costs to recover their lost margins due to appreciating rupee and also help reduce the interest arbitrage to control the surge in FII inflows.
CII strongly feels that reducing interest rate would go along way in boosting demand and investments. It would also reduce the operating costs of exporting SMEs who have been facing decline in profit margins due to appreciating rupee.
The impact of high interest rates have been severe on SMEs, especially exporters who have been the worst due to the appreciating rupee and has eroded their profit margins significantly.
In its other recommendations on monetary policy, CII said that in the US, the Federal Reserve takes the unpredictability out of its measures to the extent possible, by preparing the market before an intervention. The RBI could follow a similar practice, in order to ensure that there are no knee jerk reactions in the market.
Foreign Exchange (forex) hedging is a complex subject. In volatile forex market all exporters need to hedge to protect their realization. RBI could create a special window in domestic banks to help small exporters hedge their forex earnings.
Lack of a foreign currency exchange leaves Indian industry in a disadvantageous position when there is significant volatility in currency markets. A formal hedging mechanism for corporations to take positions on foreign currencies is absent.
Growth forecasts should not be made keeping inflation in mind, but inflation forecasts should be made keeping growth in mind. Must realize that for the first time the economy is on a virtuous cycle of growth, which has the potential to create wealth on a sustained basis, which could then be distributed. Therefore, must not sacrifice growth at any cost.
Infrastructure investments requirement has been estimated to be US $ 475 billion for the next five years. In a recent CII CEOs poll on Infrastructure revealed that ECBs were one of three most important sources of finance for infrastructure, especially in the light of lack of deeper corporate bond markets, the recent cap on ECBs may be relaxed for investments in infrastructure projects.
Confederation of Indian Industry
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