Rate hike will hurt: Industry

India Inc today said the Reserve Bank of India's decision to raise the reverse repo rates by 50 basis points would hurt the manufacturing sector.

India Inc on Tuesday said the Reserve Bank of India's decision to raise the reverse repo rates by 50 basis points (bps) would hurt the manufacturing sector.

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The Federation of Indian Chambers of Commerce and Industry (FICCI) termed the hike a "huge surprise". President Rajan Bharti Mittal said the reverse repo increase will "incentivise parking of funds by banks with RBI thus reducing lending opportunities to industry."

The RBI's tight monetary policy was spelt out by Governor D. Subbarao, who hiked the repurchase rate by 25 basis points to 5.75 percent and the reverse repurchase rate by 50 basis points to 4.50 percent with immediate effect.

The industry's perception is in sharp contrast to that of the government and the apex bank.

While Finance Minister Pranab Mukherjee said the policy will help in containing soaring inflation, Planning Commission Deputy Chairman Montek Singh Ahluwalia said the change in rates would not adversely affect the economy.

ASSOCHAM President Swati Piramal said: "The lending rates may move north by 25-50 basis points, making bank’s borrowings a little more dearer since repo rate and reverse repo rate have been hiked by 25 to 50 basis points."

Speaking to reporters at the RBI headquarters here, Subbarao said that lending rates might increase as credit demand goes up.

"As credit demand picks up, we expect lending and deposit rates to go up," said Subbarao.

Siddharth Shankar, economist at a financial services firm, said: "I think RBI took a slightly aggressive stance towards inflation ... By raising the repo by 25 bps and reverse repo by 50 bps it is ensuring a balanced liquidity position in the system."