Interest rate hike will hurt growth, fears FICCI

June 15th, 2011 - 6:17 pm ICT by IANS  

New Delhi, June 15 (IANS) An industry chamber Wednesday urged the country’s central bank not to raise interest rates as any further such hike would dampen business sentiments and hurt economic growth.

Ahead of the mid-quarter review of the monetary policy, the Federation of Indian Chambers of Commerce and Industry (FICCI) urged the Reserve Bank of India (RBI) to fine tune monetary policy and desist from raising interest rates.

The RBI, it is expected, may hike the key policy rates further during the mid-quarter review of the monetary policy Thursday to curb inflation, which soared to 9.06 percent in May.

FICCI said increase in interest rates would affect business sentiment adversely, slow down the pace of investments further and thereby hit economic growth.

“We have seen the central bank taking swift measures, with key policy rates being hiked nine times since March 2010, to rein in inflationary pressures. However, food inflation has proved to be stubbornly insensitive to any such moves,” Udayan Bose, chairman of corporate finance committee at FICCI, said in a letter to RBI Governor Duvvuri Subbarao.

“As this is largely a problem arising out of demand-supply mismatch, any move to control such inflation through monetary moves has been futile. On the contrary, aggressive monetary tightening is having an adverse bearing on economic and industrial growth of the country,” he said.

To curb the stubbornly high inflation, the RBI has hiked key policy rates nine times in the past 15 months. The central bank raised the repo rate by 50 basis points on May 3 to 7.25 percent and said that henceforth, the reverse-repo rate would always be pegged at 100 basis points below it.

Most analysts expect at least a 25 basis point hike in the repo this time around.

Bose said hike in interest rates would not be effective in curbing inflationary pressure.

“Inflation is no longer confined to food articles alone and has become more generalised. However, the inflationary pressure emanating from manufactured products has less to do with demand side pressures and is largely the result of rising input costs,” he said.

“And for addressing this, we need creation of more capacities in all segments encompassing industrial raw materials. Unfortunately, a tight monetary policy also hits at this very objective - limiting capacity addition at a time we need it most,” he added.

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