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‘Rate hikes can impact growth and investment’

NEW DELHI: Indian industry expressed disappointment over the Reserve Bank of India’s monetary policy announcement on Tuesday saying it will dampen growth and dent business confidence as well as investments in the country.

While the markets too reacted sharply, almost all apex chambers were apprehensive about the negative impact of the policy announcement on sustainability of growth and industries’ expansion plans.

Disappointed by the RBI’s monetary steps to contain inflation from the present about 12 per cent to 7 per cent by the year end, industry said that the hike in the cash reserve ratio (CRR) and rates for RBI’s short-term lending to banks may have limited impact on rising prices but could hit growth and investment.

The industry chambers regretted that suggestions for status-quo in the monetary stance had not been heeded to and pointed out that the RBI itself had lowered the economic growth prospects to eight per cent from its earlier projection of 8-8.5 per cent.

“This action on the part of RBI to simultaneously use two instruments repo rate (increased by 50 basis points) and CRR (increased by 25 basis points) could further exacerbate the declining confidence level and manufacturing sector growth,” FICCI Secretary General Amit Mitra said.

Similarly, the Confederation of Indian Industry (CII) in its reaction said, “Concerns over sustaining growth in the environment of monetary tightening remain.

Increase in interest rates could impact the investment momentum and corporate cash flows”. Future trends in corporate profitability and execution of the investment pipeline “would need to be monitored in this context”, it observed.

Assocham President Sajjan Jindal said, “Tightening of the money supply may lead to a fall in the overall business confidence with companies postponing their investment plans in the time to come.”

With the decline in the foreign exchange reserves recently resulting in a reduction in the overall money supply in the system, he said a further hike in interest rates could decelerate the situation further.

Making similar observations, Federation of Indian Export Organisation Chief Ganesh Gupta said the RBI’s policy would hurt micro, small and medium enterprises sector adversely.

“The overall impact of the increase in the repo rate and CRR would be an increase in the prime lending rate impacting export credit rates to SMEs,” he said further noting that even the agriculture sector would be affected.

PHD Chamber President L. K. Malhotra said rate hike was bound to slow down the growth rate of gross domestic product (GDP).

“Moderation in economic activity may impact expansion of new jobs and even lead to lay-offs in certain sectors,” he said, adding that the PLR of banks had increased to 13.50-17.25 per cent and the hike in CRR and repo rate was bound to lead to further rise in lending rates by commercial banks.

Indrani Dutta writes from Kolkata:

Reacting to the measures announced by the RBI in its monetary policy review, Indian industry has said that while some harsh measures were expected, industrial growth will suffer. They also feared that the inflationary scourge will be fuelled again as industries pass on the impact of higher cost to consumers.

Sanjay Budhia, President, Indian Chamber of Commerce (ICC), said that it was a delicate situation, which created some compulsions on the inflation-control front for the RBI.

“We are in a high-interest rate regime and each project might have to rework its cost if funds have not been tied up already”. However he felt that industry had to tighten its belt and look for cost-reduction measures internally. “It cannot stop midway,” Mr. Sanjay Budhia said.

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