New Delhi: Industry body Assocham said on Thursday the Reserve Bank should reduce the cash reserve ratio (CRR)- the portion of deposits banks have to park with the apex bank - and statutory liquidity ratio (SLR) to help increase the cash base available to banks for lending.
In a note to RBI, the chamber said that reducing CRR and SLR, the portion of deposits that banks are required to invest in government securities, would facilitate the economy to enter the double digit growth orbit.
The economy requires expansion of lendable resource base of banks to meet increased investment requirements due to accelerated activities, Assocham President Swati Piramal said in a statement here.
Despite gradual reduction, both the rates are still high compared to international averages.
The statutory liquidity ratio stands at 25 %. The central bank in April 2010 hiked CRR to 6 %.
“Given the government’s resolve to reduce fiscal deficit, the relevance of CRR to control expansion of credit has significantly lessened and SLR should not be treated as a major instrument for funding public sector,” she said.
Assocham said that the headline inflation continues at discomforting levels, even after repeated tightening measures taken by RBI from time to time.
The overall inflation for August stood at 8.5 %.
One result of the RBI’s attempts to control inflation through monetary measures has been that the credit growth in the current year has slowed down which could impact growth momentum in the coming months.
Assocham said that inflation is more on account of supply side constraints, rather than excessive money in the system.
Piramal said that the cost of borrowing in India is one of the highest in the world and it impacts manufacturing and competitiveness.
“The spread between the lending rates and borrowing rates needs to be reduced,” she said.
Soft interest rates will not fuel inflation as the main reason is supply side shortages in agriculture products and management of supply side can contain inflation, Assocham said.