Industry worried over further interest rate hikes

NEW DELHI - Leading industry associations were concerned about more rate hikes by India’s central bank following its increase of 25 basis points in short-term interest rates Tuesday, and said more monetary tightening could dampen industrial growth.

With inflation rising to double digits and factory output growing in spurts, the Reserve Bank of India (RBI) hiked its short-term lending (repo) to 6.5 percent and borrowing rates (reverse repo) to 5.5 percent that could make commercial, housing and automobile loans dearer.

“We are concerned about successive hikes and tighter monetary policy which could hurt the growth prospects of Indian industry. The most recent hike needs to be seen in the context of the tight liquidity situation and this is bound to put pressure on banks to increase lending rates further,” said Amit Mitra, secretary general of Federation of Indian Chambers of Commerce and Industry.

Reserve bank Governor Duvvuri Subbarao said the latest hike would not impact the overall growth process. The key policy rates were tinkered with for the seventh time since January last year as part of the third-quarterly review of the RBI’s monetary policy.

The central bank also revised upward its inflation forecast sharply to 7 percent by the end of this fiscal, from 5.5 percent earlier, while the projection on growth has been retained at 8.5 percent with an upward bias.

Industry, which saw factory output dip to an 18-month low in November, was already worried since the annual wholesale price inflation in non-food articles that primarily reflects the cost of raw materials was ruling at 23.07 percent for week ended Jan 8.

“We are concerned the RBI is setting the stage for a series of rate hikes that will have a negative impact on the investment momentum going forward,” said Chandrajit Banerjee, director general of the Confederation of Indian Industry (CII).

“Persistent shortage of liquidity in the banking system has already raised expectations that interest rates will harden considerably in the coming year,” Banerjee added. The other chambers also hoped the interest rates will be kept stable in the medium term.

Loans for automobiles, homes and corporate sector could go up as banks will look to pass on the interest burden to consumers. Leading bankers have already forecast a hike in the lending rates in the near term, taking into account a hike in key rates.