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Rate hikes not curbing inflation: Industry

Successive rate hikes by the Reserve Bank of India (RBI) have not helped in tackling soaring inflation but have only hampered growth, leading industry lobbies said Friday after the central bank hiked repo rate by 50 basis points.

delhi Updated: Sep 16, 2011 17:21 IST

Successive rate hikes by the Reserve Bank of India (RBI) have not helped in tackling soaring inflation but have only hampered growth, leading industry lobbies said Friday after the central bank hiked repo rate by 50 basis points.

Seeking to address the problem of high inflation over slackening factory output and overall growth, the bank has raised the repurchase rate, or the interest the central bank levies on short-term borrowing by commercial banks, to 8.25% from 8%.

Automatically, the reverse repurchase rate, or interest on short-term lending, gets hiked to 7.25% from 7%, since the RBI felt inflation levels remain well above its comfort zone.

"Even as RBI justifies this rate hike of dampening inflationary expectations, it is difficult to fathom that this will be achieved when a cumulative rate hike of 325 basis points since March '10 could not achieve this objective," said Rajiv Kumar, secretary general of FICCI.

"It is ironic that the RBI is now clearly banking for inflation rates to start declining towards the latter part of the current fiscal, based purely on base effect," added Kumar.

The latest rate hike is the 12th straight increase since January 2010. Ever since growth started slipping, India Inc. has been clamouring for a stop to the monetary tightening.

But the RBI has justified each hike citing high inflation. Latest data showed annual inflation rate for August, based on the wholesale price index, inching closer towards double digits at 9.78%, while food inflation still remained at elevated levels.

The Confederation of Indian Industy (CII) said it was high time policymakers looked at other mechanisms to control rising inflation.

"Actions that could be taken include faster clearance of infrastructure projects, implementation of the manufacturing policy to create manufacturing zones and easing bottlenecks in the distribution of food products," said Chandrajit Banerjee, director general of CII.

"Without these, we are concerned about a serious deceleration in industrial growth rate," he added.

The growth of India's gross domestic product (GDP) decelerated to 7.7 per cent in the first quarter of 2011-12 from 7.8% in the previous quarter and 8.8% in the corresponding quarter of the previous year.

Industrial output, last recorded in July, had fallen sharply, growing at a meagre 3.3% -- the slowest pace in 21 months.

Economists believe that there could be another rate hike in October when the RBI conducts the quarterly monetary policy review.

"With the renewed upward pressures emanating from the food prices and hike in petrol prices, RBI is expected not to pause and continue with another round of a 25 basis point rate hike in the upcoming policy review," said Arun Singh, senior economist, Dun & Bradstreet India.

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