More rate hike by RBI to impact manufacture sector: India Inc

Industry body Ficci today said India's manufacturing sector is expected to register a moderate growth during January-March, 2011 over the previous two quarters due to the continuous monetary tightening by the RBI.

The RBI has hiked policy rates seven times since March, 2010 to tame inflationary pressure. It is expected the central bank may come up with another round of rate hike in its next review of policy as the headline inflation is over 8 per cent, much above the comfort level of 5-6 per cent.

Ficci's survey on manufacturing segment showed a significant fall in the overall sentiment and expectations of the sector in the fourth quarter of 2010-11, as compared to the previous two quarters.

"The most important factor for moderation in growth was the rise in the cost of capital due to monetary tightening measures introduced by the Reserve Bank of India," it said.

Out of 400 respondents, over 77 per cent of felt that the growth of manufacturing sector is going to moderate in the last quarter of the current financial year.

Ficci said over 34 per cent said that their cost of borrowing has increased significantly in the last 2-3 months.

In January, manufacturing growth plummeted to 3.3 per cent from 17.9 per cent a year ago.

Due to hike in key policy rates by the RBI, "loans from the banks have turned out to be costly with Indian banks revising their lending rates upward", it said.

"The prime lending rates of banks are in the minimum range of 12.75 per cent and 13 per cent," it said adding "any further as it would directly impact the capacity additions and growth of the manufacturing sector".

Assocham, too, cautioned the RBI against any increasing in repo rate. "Input costs and wages have topped up in India, squeezing profit margins in the manufacturing sector," it said.

The chamber has asked the RBI to postpone raising interest rates by 25 basis points till the new agriculture crop which is expected by March-April.