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Industry vs RBI in policy tangle

business Updated: Mar 16, 2011 20:12 IST
HT Correspondent

Industry captains and experts will be keenly watching for cues that the Reserve Bank of India (RBI) will send out in its mid-quarter review of the monetary policy on Thursday.

The RBI has raised key policy rates seven times so far in 2010-11 to cool prices.

Inflation rose to 8.31% in February from 8.23% in January.

In another month of subdued growth, India's factory output rose 3.7% in January, marginally higher than the revised 2.53% expansion in the previous month.

Capital goods output contracted 18.6 % in January indicating higher cost of credit and rising input cost may have forced companies to defer investments.

"The performance of the capital goods sector is of particular concern as it has witnessed negative growth for the second consecutive month," said Rajiv Kumar, director-general, Federation of Indian Chambers of Commerce and Industry.

"The rising cost of capital may be responsible for this."

In January, RBI maintained the repo and reverse repo rates at 6.5 % and 5.5 % respectively.

A higher repo - the rate at which RBI lends to lenders - raises banks' borrowing costs prompting them to raise interest rates for borrowers.

A higher reverse repo - the rate at which RBI absorbs excess cash - means it would suck cash from the system.