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Interest rate hike to hit investment: India Inc

business Updated: May 03, 2011 15:11 IST

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Disappointed with RBI's strong signal of interest rate hikes, a large section of India Inc on Tuesday said the upward revision in key rates in the credit policy will dampen the investment environment.

"This is certainly a very hawkish monetary stand and one which would make the investment environment more difficult. We are afraid that with growth slowing down, employment targets will not be achieved and this could generate greater social pressure," Ficci Director General Rajiv Kumar said.

CII too said that increase in repo rate (lending rate) by 50 basis points by RBI would have an adverse impact on investments and growth.

"The continued monetary tightening without any movement on structural reforms to address supply side bottlenecks will have an added impact on capacity creation and expansion," chamber's Director General Chandrajit Banerjee said.

In the inflation-growth tradeoff, RBI Governor D Subbarao gave a clear priority to checking price rise stating "high and persistent inflation undermines growth by creating uncertainty for investors and driving inflation expectations".

The RBI has lowered the country's economic growth projection at 8 % for the fiscal against the Government's estimates of 9 %.

However, Assocham took a different line and appreciated constraints faced by RBI. It said the step is positive as it addresses the demand-side pressures.

"The new interest rate environment will moderate inflation...fostering price stability which is key to sustained growth and financial stability," Assocham President Dilip Modi said.

Financial solution provider firm SMC Global Securities said RBI had no option but to increase the repo rate to contain inflation which refuses to decline in the wake of high crude oil and commodity prices.

Industry was of the view that India needs to boost agricultural growth and productivity to increase investments and tame inflation.

Fieo President Ramu S Deora said RBI's concerns on inflation was "understandable" and demanded a subsidy on exporters loan. The government's interest subvention scheme expired on March 31.

On lowering of growth projection, Brokerage firm India Infoline Economist Ashutosh Datar said it would be about one percentage point lower than 8.6 % estimated GDP in 2010-11.

"We expect fiscal 2011-12 GDP growth to decelerate to 7.7 %," he said.