Interest rate hike to hurt growth, says industry

Interest rate hike to hurt growth, says industry

New Delhi: Indian companies on Thursday expressed disappointment over the interest rate hike announced by the Reserve Bank of India (RBI), stating that fresh investment and economic growth will take a hit due to the increasing cost of finance.

“I fear economy (growth) will contract because when input costs go up, prices of goods will increase," the chairman of Ficci’s Finance Committee, Udayan Bose, said.

The RBI raised the short-term lending rate by 25 basis points to 7.50% on Thursday and signalled that its tight monetary policy stance will remain a key tool to rein in inflation, which is currently hovering above 9%.

However, the industry felt that high interest rates will hurt growth. “When the growth curve was 9-9.5%, interest rates were low," Bose said, apprehending this would not be the last rate hike by the central bank.

“I don’t think so," he said when asked whether it would be the last interest rate hike.

The latest rate hike is the tenth by the RBI in the last 15 months and the banks have increased their lending rates by between 150 and 300 basis points between July, 2010, and May, 2011.

Assocham president Dilip Modi said while the successive rate increases since March, 2010, have not been able to control inflation, “high input prices, rising finance costs and global uncertainties are adding to negative sentiments".

According to CII director general Chandrajit Banerjee, “The current spell of inflation, being largely associated with supply-side bottlenecks and imported commodities, cannot be addressed by monetary tightening alone."

He said it was time the government looked at the fiscal policy as well to maintain a balance between growth and inflation.

PHD Chamber president Salil Bhandari said the investment sentiment has dipped significantly, as tight monetary conditions have hit financial markets, “causing negative wealth effects".

However, according to an RBI analysis, the higher cost of finance is restraining credit growth, “but it still remains fairly high, suggesting that economic activity is holding course".

Year-on-year non-food credit growth remained at 20.6% in early June 2011, despite moderation.