RBI rate hike may impact industrial growth

November 2nd, 2010 - 7:10 pm ICT by IANS  

New Delhi, Nov 2 (IANS) The Reserve Bank of India (RBI) move to raise interest rates for the sixth time this year will have a negative impact on interest sensitive sectors like consumer durables, auto and housing, industry lobbies said.

“Although RBI has raised rates in the background of high inflation rate, we fear that this move could seriously impact consumption demand,” said Amit Mitra, Secretary General of the Federation of Indian Chambers of Commerce and Industry.

Mitra said the RBI’s decision to raise short-term borrowing and lending rates by 25 basis points each would negatively impact industrial growth.

“This will adversely impact the interest sensitive sectors like consumer durables and auto which have led the growth hitherto as also on housing demand. Going by RBI’s own submission, the IIP data although robust has been highly volatile signalling uncertainty in growth,” he added.

In its second-quarter review of monetary policy Tuesday, the RBI hiked repurchase rate from 6 percent to 6.25 and reverse repurchase rate from 5 percent to 5.25 percent. This is the sixth time the central bank has tweaked interest rates to tame inflation.

“We believe that banks will not immediately raise their lending rates, as that would curtail credit growth and constrain the economic recovery. We are reassured by RBI’s statement that it is unlikely to increase rates again in the near future,” said Chandrajit Banerjee, Director General of the Confederation of Indian Industry.

RBI Governor D. Subbarao said the central bank is unlikely to raise rates at least for the next three months in a bid to strike a balance between inflation concerns and economic growth.

President of Associated Chambers of Commerce and Industry (Assocham) Swati Piramal said rate hike in the recent months had varied impact on industrial growth and inflation.

“In view of the prevailing economic conditions, Assocham appreciates the RBI’s balanced move. The monetary stance that has been adopted since the beginning of the recovery process has been resulting in varied impacts,” she said.

Shanto Ghosh, Principal Economist, Deloitte in India, said: “The sixth consecutive rise in the interest rates by the RBI is somewhat untimely and largely unnecessary. Food price inflation has started coming down and is likely to continue in the months ahead. On the other hand, recent data on industrial activity indicates a slowing down in the real sector of the economy.”

Moreover, there are growing concerns regarding the excessive inflow of FII funds. In light of this, there is a good chance that an over-zealous attempt to rein in inflationary expectations causes the investment (and growth) momentum to be adversely affected, Ghosh added.

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