CHENNAI: The Confederation of Indian Industry (CII) has called upon both the Reserve Bank of India and the Government of India to infuse more liquidity into the economy and ensure that more foreign capital enters the country while keeping the confidence of the investor intact.
For this purpose, it has recommended a further 150 basis point cut in repo rates not in a single shot but in quick succession and spread over several weeks. R Seshasayee, Chairman of the CII Economic Policy Council told media persons on Thursday that despite an infusion of liquidity into the markets by RBI, the liquidity shortage had again gone upto Rs 1,00,000 crore.
A further reduction of SLR by two per cent in addition to the earlier one per cent cut, allowing oil and fertilizer bonds to be acceptable to SLR has also been recommended. This would increase the funds for investment by banks and along with the cut in the repo rate would provide impetus to investment demand.
While acknowledging that the global financial meltdown had so far manifested itself on the Indian economy in a limited way, CII suggested that the RBI and the Central Government should ensure that India remained an island of stability.
Moreover, Mutual Funds had a significant part of their portfolios in bank Certificates of Deposits (CDs) and debt instruments issued by NBFCs. Redemption pressure on mutual funds would distort the financial markets and create stress on liquidity.
Hence, CII has proposed that RBI should set up a neutral and common counter-party, like the Clearing Corp of India to undertake repos in CDs. A similar liquidity mechanism had to put in place for NBFCs.
RBI was advised to provide this liquidity to MFs and NBFCs till there was stability in the market place and assets were realized.
For foreign exchange management, CIIs suggestion was to open up by easing foreign direct investment norms. Extension of FDI limit to other sectors besides insurance, removal of the caps on NRE and FCNR (B) deposits, opening up of government debt market to foreign institutional investors since higher interest rates would attract investors was also recommended.