Wednesday, June 20, 2012

Finance minister defends RBI, 'India Inc' dismayed

While Indian finance minister, Pranab Mukherjee, sought to defend the Indian central bank, the Reserve Bank of India (RBI), decision to keep key interest rates unchanged in its monetary policy review, corporate India was disappointed and expressed dismay that the apex bank has missed ?the bigger picture?.

According to Mukherjee, inflation weighed on the mind of the RBI in its decision to keep key interest rates unchanged. High inflation numbers "might have influenced their [RBI?s] decision-making process. And normally in mid-quarter review, it is not necessary for the governor to consult the minister,? Mukherjee told reporters.

India Inc (Indian firms) slammed RBI?s ?inflation-centric policy? to keep interest rates unchanged, with the Confederation of Indian Industry director general, Chandrajit Banerjee, saying the central bank has missed the bigger picture at a time ?when millions of livelihoods are under threat due to declining GDP growth?.

In a scathing attack on the RBI, Ficci said: ?The RBI decision to not reduce the repo rate is even more difficult to understand in light of its own admission that the persistence of overall inflation both at the wholesale and retail levels, in the face of significant growth slowdown points to serious supply bottlenecks and sticky inflation expectations.?

The RBI, however, defended its decision of not tinkering with the rates, saying in the current growth-inflation dynamics, several factors were responsible for the slowdown in activity, particularly in investment, "with the role of interest rates being relatively small?.

It is not clear at all how the supply bottlenecks and high levels of vegetables and protein prices, which is the main cause of persistent inflation, will be tackled by keeping interest rates high, the Federation of Indian Chambers of Commerce and Industry (Ficci) said.

Due to lack of reforms, coupled with continued high interest rate policy of the RBI, the economy is headed for a long period of ?slowflation? which will bring us closer to a major crisis, the chamber added.

"Therefore, a cut in the repo rate would have been very timely and may have provided some boost to the already flagging growth,? Ficci said.

"A cut in the policy rates could have given some boost to the industrial sector, particularly when the growth rates had plummeted to 5.3 per cent in the last quarter,? said Rajkumar Dhoot, president of the Associated Chambers of Commerce and Industry of India (Assocham).

Unsettled global economic outlook and tight monetary stance by the RBI have weighed on the investment scenario and overall growth prospects of the Indian economy, said Sandip Somany, president, PHD Chamber of Commerce and Industry. The tight monetary policy stance will lead to a period of stagnation and falling business confidence in the Indian economy, he said.

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