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Policy review: A rate hike pause on cards?

business Updated: Oct 31, 2010 22:08 IST
Mahua Venkatesh
Mahua Venkatesh
Hindustan Times
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Policy makers and industrialists will be keenly observing cues sent out by the Reserve Bank of India in its mid-quarter policy review on Tuesday amid anticipation that the central bank would signal a pause in interest rates hikes to goad companies to go ahead with planned expansions.

"The upcoming policy review of the RBI is the first time since the central bank began its exit late last year that there is a strong case for it to pause," said Rajeev Malik, senior economist at broking and research firm CLSA, Singapore.
The RBI has raised key policy rates five times so far this year as prices raced into high-double digits pummelled by a supply crunch of staple items.

Inflation has shown signs of cooling — it was 8.62% in September — but still remains above worrisome levels.
In September RBI had increased the repo rate by 0.25 percentage points to 6%. It had also increased the reverse repo rate increased by 0.50 percentage points to 5%.

A higher repo, the rate at RBI lends to lenders, raises the banks’ borrowing costs prompting them to raise interest rates for home, auto and corporate borrowers. A higher reverse repo — the rate at which RBI absorbs excess cash — means it would suck cash from the system to stymie demand and cool prices.

Most banks have since raised lending rates to borrowers resulting in sluggish credit offtake.

RBI data shows that the total outstanding credit of the banking system has gone up just 5.6% to R34,22,291 crore since the beginning of this financial year.

Industry body Confederation of Indian Industry (CII) said that any further hike could have a negative impact on consumer demand as well as corporate investment.

Factory output growth, measured by the index of industrial production (IIP), slumped to 5.6% in August from 10.6% in July, pulled down largely by low growth in the capital goods sector mirroring weak pick up in fresh investment.

Shikha Sharma, managing director, Axis Bank earlier said that credit off-take is likely to pick up in the coming months.
“RBI will consider all issues before taking a decision on interest rates,” she said.