Reserve Bank of India’s move to hike repo rate (the rate at which RBI lends to banks) and cash reserve ratio (CRR or the portion of deposits the banks have to keep with the RBI), threatens to stifle the pace of economic growth. The corporate sector is expected to bear the brunt with demand slowdown and higher interest costs putting pressure on their margins.
On Tuesday, RBI increased the repo rate to 8.75 per cent — a six-year high — from 8.25 per cent, and CRR to 8.75 per cent from 8.25 per cent. This two-pronged move will make it difficult for the economy to maintain its expected growth momentum of 8-8.5 per cent.
Economists predict a slow down to 7.5-8 per cent level. “Economic growth is unlikely to be hit drastically,” said D.K. Joshi, principal economist, Crisil. “It will be in the range of 7.5-8.0 per cent for the current year, mostly due to interest rates going up and demand coming down.”
Banks, which have been holding their lending rates so far, will be forced to hike them in the next few days by at least 100 to 150 basis points (100 basis points is one percentage point). This may force some companies to cut down on their expansion plans for now.
Typically, rate hikes result in higher cost of servicing the debt portion of projects, making them unviable at times.