12th increase since March 2010
Industry has expressed disappointment at the Reserve Bank of India (RBI) yet again hiking interest rates last week.
Ms Bhavna Doshi, President of the Indian Merchants' Chamber (IMC), said that IMC was concerned about the overall impact of the further interest rate hike, which would have an adverse effect on the growth and expansion plans of businesses. "IMC believes that its impact on the supply side would be adverse as is already reflected in the slowing down of industrial production. Such increase in interest rates could tame inflation over a period of time by slowing down growth in short term but such slowdown is a matter of concern. Concentration on food inflation and measures to tame it by facilitating growth of the agriculture sector is the need of the hour. Quick fiscal measures are required to address this with an eye on long-term sustainable development of the economy," she observed in a statement.
Industry felt that the move would choke economic growth instead of reining in inflation. Industry chambers are worried about the rise in interest rates on consumer and corporate loans slowing down consumption and investments in the economy.
"Even as RBI justifies this rate hike for dampening inflationary expectations, it is difficult to fathom that this will be achieved when a cumulative rate hike of 325 basis points since March 2010 could not achieve this objective," said Mr Rajiv Kumar, Secretary-General, Federation of Indian Chambers of Commerce and Industry (Ficci).
"Currently, all domestic indicators point toward a slowdown. The sequential growth in consumption is currently at a nine-quarter low. Further, sequential growth in gross fixed capital formation is at the second lowest in the last six quarters. This rate hike will only exacerbate the current fears of an impending slowdown," he added.
Central banks all around the world are putting a pause to rate hikes, as the global economy stands on the periphery of a meltdown. RBI made a reference to the worsening global growth, but surprisingly still went ahead with a rate hike citing a jump in the August inflation rate to 9.8 per cent from 9.2 per cent in July 11, he said.
The Confederation of Indian Industry (CII) is concerned that with inflation and interest rates continuing to rise, the growth outlook for the country is deteriorating rapidly.
"At a time when economic policy should focus on the creation of jobs, it is unfortunate that the economy is being forced into a sluggish growth phase," said CII President, Mr B. Muthuraman.
Going by earlier experience of a policy-induced slowdown, it may be difficult to emerge from such a phase, he cautioned. According to CII, urgent action needs to be taken by the government to encourage implementation of projects and ease supply-side bottlenecks.
"This will not only step up the growth momentum but also ease inflationary pressure," it said.
"High value food items such as fruits and vegetables and milk are facing persistent inflationary pressures. Allowing FDI in multi-brand retail would enhance investment in back-end infrastructure and increase availability of farm products at reasonable prices," Mr Muthuraman said.
Industry body Assocham expressed a similar view that successive rate hikes by the central bank have not been able to control rising inflation.
Global economic uncertainties and high interest rate environment is likely to put the brakes on new investments and put corporate India in a difficult position to maintain the growth momentum, the Assocham Secretary-General, Mr D. S. Rawat, said.
Repo up, CRR same
Continuing with its anti-inflationary stance, the RBI raised the benchmark interest rates by quarter of a per cent point on Friday, while keeping the cash reserve ratio (CRR) rate unchanged. This is the 12th hike since March 2010, making auto, home and other loans costlier.
The decision comes as the authorities struggle to control near double-digit inflation, which is uncomfortably high for more than two years.
The repo rate now stands at 8.25 per cent, while the reserve repo gets adjusted to 7.25 per cent. The CRR remains unchanged at 6 per cent.
RBI believes the global economic environment has worsened and the recent developments are a matter of "serious concern".
"The pace of exports is unlikely to sustain on weak demand," RBI said.
Source : Exim News Service - MUMBAI, Sept. 18