Date:03/11/2007 URL: http://www.thehindubusinessline.com/2007/11/03/stories/2007110351820600.htm

Back Assocham demands cut in interest rates

‘Huge FII flow likely after Fed rate cut’

Our Bureau

New Delhi, Nov. 2 Industry chamber Assocham has urged the RBI to immediately cut interest rates to avoid a deluge of capital flows which is going to further pick up with another cut in the interest rates by the US Federal Reserve.

As the Federal Reserve Bank announced a second cut of 0.25 per cent in the interest rate in US in a move to revive the financial markets facing the crisis triggered by sub-prime defaults, Assocham has demanded that RBI follow the global cues.

India has received FII flows worth $18.8 billion in 2007, of which $9 billion has come in since the first rate cut announced by the Federal Bank on September 18. The increase is more than 113 per cent when compared to the $8.8 billion FII investment for 2006.

Pressure points

A 25 basis point cut in the interest rates by the US Central Bank would further raise the arbitrage opportunities, and India would find it difficult to manage huge capital flows arising from the developed financial markets.

The massive dollar inflow would put further pressure on the rupee which has appreciated by 10 per cent since April this year.

“The rise of the rupee would create social unrest in the labour-intensive society as already 40 lakh people have lost their jobs owing to export slowdown,” said Mr Venugopal Dhoot, President, Assocham.

The capital inflows through the direct investment route have also jumped by 100 per cent as the FDI for April-July 2007 is around $5.6 billion as compared to $2.8 billion for the similar period last year.