The RBI marginally reduced the repurchase rate (also called as repo rate) by 0.25 per cent in March 4 this year but the knitwear industry in Tirupur wants a further reduction. Small and medium enterprises that dominate the Tirupur cluster say the cost of funds is a vital element for capacity expansion and for meeting working capital requirements. Since repurchase rate is still on the higher side, borrowers are forced to pay high equated monthly installments while repaying bank loans.
The RBI had kept the repurchase rate under the liquidity adjustment facility at 7.5 per cent and decided to maintain the cash reserve ratio of the scheduled banks unchanged at 4 per cent of net demand and liability based on an assessment of current and evolving macro-economic situations. The feeling is that unless the repo rates are slashed significantly, banks are not going to reduce interest rates by a substantial margin.
The repo rate has been used as a tool to suck out excess liquidity. The repo rate was just 4.75 per cent in 2009 and has been raised subsequently with only occasional reductions. Mostly inflation has been cited as the reason for increasing the rates.