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Home arrow Business News arrow Hike in key RBI rates could weaken industrial growth
Hike in key RBI rates could weaken industrial growth Print E-mail
Written by Ganesh   
Wednesday, 27 July 2011
New Delhi: In an effort to bring down the inflation, RBI continued tight monetary policy instance by raising key policy rate (Repo Rate) by 50 basis points. This is expected to slow down the growth rate of industry, which is already suffering from an increase in the cost of funds.

The hike has been beyond the  market expectations as the transmission  of policy rates did not deliver clear signals of moderating headline inflation which continues to be at an elevated level of near double digit, said  Mr. Dilip Modi, president, ASSOCHAM.

"The 50 basis point hike in policy rates will seriously slow down the growth rate of industry, which is already suffering from an increase in the cost of funds. While it is important to control the threat caused by persistently high inflation, we cannot risk a collapse in growth which will affect employment creation. Emphasis should now be given to easing supply-side bottlenecks, speeding up economic reforms and increasing investments in the economy. In the absence of non monetary interventions, increasing interest rates alone may not help in containing inflation, particularly since it is being driven by increases in global commodity prices," said Mr B Muthuraman, President, CII.

“The single minded focus of RBI in tackling stubborn Inflation has continued its tight monetary management which it does not wish to accelerate as the up side risk to global growth as well as crude and commodity prices have not been stable and sustainable.  The increased repo rates of 50 bps, beyond market expectations, have not been welcomed by the market and there is definitely adverse impact on the already falling growth momentum in interest sensitive sectors, thus may constrain demand, added Mr. Modi.

Though the lending rates will be impacted upwards but RBI has revised the credit growth target to 18% from 19 % for the current fiscal as there is already strong visibility of transmission of monetary policy instances of the earlier hikes. The demand side compression is showing positive signals and it is believed the inflation may, though remain at elevated levels for some time, may show softening by year end.

ASSOCHAM feels that the bigger hike may not deliver the results as anticipated as the growth will be hit significantly due to high interest regime and may stroke high inflation. There is a strong need to move partly from the traditional inflation fighting policies and  built up capacity and supplement supply side bottlenecks as a more durable and sustainable measure.

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