RBI should slash interest rates: Assocham

With the inflation touching a near zero level, time is ripe for the Reserve Bank of India to slash interest rates and induce banks to increase lending to specific sectors like textiles, gems and jewellery and realty, industry body Assocham said.

About 77 per cent of CEOs, polled by Assocham in a recent survey, said the central bank needs to focus on giving a push to the sectors which have seen large-scale job losses under the impact of global economic crisis.

While majority of the respondents lauded RBI's efforts of actively reducing interest rates, they said the present interest regime is out of sync with the Wholesale Price Index-based inflation at 0.18 per cent for the week ended April 4, 2009.

RBI is scheduled to unveil the annual credit policy on Tuesday in the midst of the falling industrial production and shrinking exports, impacted by the global downturn.

Assocham said the construction sector should be given a boost and the central bank should relax the risk weightage attached to the sector. With the increased risk perceptions, banks are compelled to charge higher interest rates from borrowers in the realty sector than others.

"It is a good time for RBI to re-look at the regulations imposed on the real estate sector...It had increased risk weightage in case of commercial real estate from 100 per cent to 150 per cent," Assocham said. On the falling industrial growth rate (which showed 1.2 per cent decline in IIP in February 2009), the study said banks should not be risk-averse and adopt a liberal approach in lending.

Assocham said RBI should evolve new methods of enhanced money flow and rapid credit delivery in the economic system.

The corporate debt market, which accounts for only 14 per cent of the total debt trading, is not well developed. The industry feels that policy makers should add vibrancy to the debt market.

About 76 per cent of the company heads felt that RBI has done a good job in warding off the Indian banks from the global financial crisis.

However, the domestic banking system still requires higher degree of transparency, the chamber said.

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