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Interest rate hike to dampen industrial growth, industry fears

business Updated: Nov 02, 2010 16:42 IST
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India Inc today said the hike in short-term lending and borrowing rates by the Reserve Bank of India (RBI) could "seriously" dampen industrial growth, particularly auto and housing segments.

The persistent hikes in rates (repo and reverse repo) by the RBI can pose further challenge to Industrial growth, Ficci Secretary General Amit Mitra said. The central bank has raised these rates for the sixth consecutive time this year.

"This in turn would adversely impact the interest sensitive sectors like consumer durables and auto, which have led the growth hitherto as also on housing demand," Mitra said. He said that although the RBI has hiked rates on account of high inflation rate, but "they fear that this move could seriously impact consumption demand".

Industry body Confederation of India Industries (CII) and Assocham said that the move could lead to higher interest rates, and impact the growth momentum of the economy. The chambers asked the Reserve Bank to strike a good balance between maintaining the country's growth and managing inflation.

Echoing Mitra's thoughts, Assocham President Swati Piramal said the policy rate hikes are likely to immediately increase lending as well as deposit rates of banks.

However, CII was of the opinion that the banks would not immediately raise the lending rates. "We are reassured by the RBI's statement that it is unlikely to increase rates again in the near future," CII Director General Chandrajeet Banerjee said.

In the RBI's mid-year policy review, it announced an increase of 25 basis points in key short-term lending and borrowing rates to 6.25 per cent and 5.25 per cent, respectively, to tame high inflation. Headline inflation stood at 8.6 per cent for August, while the food inflation at an elevated 13.75 per cent for the week ended October 16.

The RBI retains GDP growth forecast at 8.5 per cent for 2010-11. In the first quarter of 2010-11, the economy grew at 8.8 per cent. According to Federation of Indian Export Organisations (FIEO) President, A Sakthivel, the increase in the reverse repo would increase the rate of export credit.

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