Textile Industry Miffed With RBI’s Restraint On Rate Cut

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Textile Industry Miffed With RBI’s Restraint On Rate Cut

The recently Monetary Policy Committee by the Reserve Bank of India (RBI) has kept the policy repo rate unchanged at 6.25 per cent, and moved its stance from ‘accommodative’ to ‘neutral’. The whole of domestic industry in general and textiles in particular has expressed their disappointed with the RBI’s decision to keep the repo rate unchanged. They were expecting a reduction in interest rate, post demonetization which has impacted some of the labour-incentive sectors like textiles and garments adversely.

“A cut in the repo rate would have boded well for the economy. Giving a push to demand which has taken a hit in the demonetization process is critical as also the need to incentivise domestic private investment in the country which remains lackadaisical. Moreover, the government remains committed to fiscal prudence which implies some space for the RBI to maintain an accommodative stance”, says Pankaj Patel, president, FICCI.

“We do take cognizance of the fact that banks have moved forward to revise down their lending rates over the last month. However, a more sustained effort would be required to bring a turnaround in domestic private capex cycle”, adds Patel.

“In the given situation when the textile industry is facing some difficult time following demonetization, any move to bring down the interest rates would have been helped the working capital-led industry like textiles. Besides, it would have helped in boosting the sentiment and thereby the investment cycle. However, I can understand the prudence approach adopted by the central bank which is evaluating various macro economic factors,” states Rahul Mehta, President, CMAI.

Exporters in the Tirupur cluster are disappointed with the RBI’s decision to keep the repo rate unchanged at 6.25 per cent. They were expecting a reduction in interest rate after the upheaval created by demonetisation.

“A reduction is as important at this juncture to increase competitiveness at a time when export growth rate was a meager 3.54 per cent for the nine month period of this fiscal year 2016 -17,” says a Tirupur-based garment export who feel this is the right time for knitwear sector to capture the market that’s leaving China, due to an increase in cost of manufacturing. If the opportunity is missed, the market would be captured by competing countries like Bangladesh, Vietnam, Indonesia and Cambodia.

The exporters of the Southern hub also of the view that growth of the apparel and textiles sector, which is labour intensive, is possible only when they get borrowings at a lower rate. Similarly, they are concerned over the lack of thrust given to adequately fund the Pradhan Mantri Rojgar Protsahan Yojana, a scheme that was envisaged during 2016-17 financial year to incentivise employers for generating employment.

However, the FCCI President has welcomed RBI’s decision to establish an Enforcement Department with the objective of ensuring sound framework for enforcement action and also the Standing Committee on Cyber Security which is critical for the success of digitization being aggressively pursued by the government.

According to credit rating agency, CRISIL, a ‘neutral’ stance gives the RBI the flexibility to move in either direction of the interest rate cycle as macro conditions permit. The shift reflects the central bank’s decision to exert caution on the inflation front in its journey towards the medium-term inflation target of 4 per cent. The RBI forecasts GDP growth in this and next fiscal at 6.9% and 7.4%, respectively, which is exactly CRISIL’s call, too.

CRISIL believes that at 6.25%, domestic macros are much more comfortable compared with November-December 2010, when the repo last touched this level. That was when consumer price inflation (CPI) averaged around 12% and the government’s fiscal deficit was nudging 5% of GDP. Today, inflation is averaging around 4.7% for the current fiscal and fiscal deficit is at 3.5% of GDP. What’s more, not only has government exercised fiscal restraint in a year when the domestic demand is weak, but the quality of spending is somewhat better with a quarter of total spending going for capex, up from 20% in fiscal 2011.

The rating agency says that the central bank’s focus will now be on further pushing the transmission of rate cut to borrowers so they can benefit from the 175 bps of policy rate cuts announced since January 2015. This fiscal, transmission has improved a touch because of demonetisation-driven liquidity, the introduction of the marginal cost of lending rate (MCLR), and successive reduction in small savings interest rates by the government.