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Govt says rate hike won’t hurt investment

The Govt defended the RBI's decision to hike a key lending rate, claiming it would not hurt growth and investment demand, but few among captains of industry agreed.

business Updated: Jun 25, 2008 21:43 IST

The government on Wednesday defended the Reserve Bank of India's decision to hike a key lending rate, claiming it would not hurt growth and investment demand, but few among captains of industry agreed.

“The objective of the RBI is to moderate and manage aggregate demand. The intention is to achieve the objective while ensuring that the prospects for overall economic growth remain positive,” the finance ministry said in a statement.

The central bank had on Tuesday increased the repo rate—the rate at which RBI lends to commercial banks in the short term —to 8.50 per cent from 8 per cent. It also increased the cash reserve ratio—the share of deposits that banks must hold in reserves -- to 8.75 per cent from 8.25 per cent.

The move is intended help rein in inflation, which surged to a 13-year high of 11.05 per cent on the back of high global crude oil prices last week.

But most experts and industry leaders believe it would now push commercial banks to increase lending rates across the board, adversely impacting investment in new projects and thereby hurting growth.

“We are already in a downward phase. The current rate hike will add to that burden,” said Harsh Pati Singhania, senior vice president of the Federation of Indian Chambers of Commerce and Industry.

Experts said the prospects of robust growth and a wide market base had propelled companies to enhance capacities and take the investment rate in the country to an all-time high 31.9 per cent of GDP in 2007-08, in spite of a series of interest rate hikes. But now, with the outlook for growth turning gloomy, few companies would be willing to risk new investments at higher interest rates.

The RBI’s decision “is likely to hit the demand in the interest sensitive sectors, particularly, automobiles, consumer goods and real estate,” said Yashika Singh at Dun & Bradstreet India. “Along with the rising cost of investible funds, it could adversely affect capacity expansion plans.”