Industry hails RBI intent not to hike rates further

Seeking to tame high inflation, which has hovered close to double digits, the central bank has raised the repurchase rate, or the interest it levies on short-term borrowing by commercial banks, by 25 basis points to 8.5 percent.

Automatically, the reverse repurchase rate, or interest on short-term lending, gets hiked to 7.5 percent from 7.25 percent.

The current increase in repo rate will, however, make auto, housing and commercial loans dearer again.

"We appreciate the guidance given by RBI that further rate hikes may not be warranted," Chandrajit Banerjee, director general of Confederation of Indian Industry (CII) said on the second quarterly review of the monetary policy.

CII also welcomed the proposals of structural reforms and greater emphasis on encouraging private sector investments in the supply side to tame inflation.

"Some areas that require immediate attention include clarity on policies with regard to land and the availability of critical inputs such as electricity," Banerjee said.

The latest rate hike is the 13th straight increase since January 2010. Ever since growth started slipping, India Inc has been clamouring for a stop to the monetary tightening.
But the RBI has justified each hike citing high inflation.

Latest data showed annual inflation rate for August, based on the wholesale price index, inching closer to double digits at 9.78 percent, while food inflation in double figures.

The Federation of Indian Chambers of Commerce and Industry (FICCI) said the 25 basis point increase was expected but its projections on inflation may be off the track as a further depreciation in the rupee could add to inflationary pressures.

FICCI also pointed out that the apex bank's predictions of a seven percent inflation rate by March 2012 may be underestimated as it is solely based on effect of base rate hike on borrowings.

"This is based almost entirely on the expectation that the higher base effect will bring down the inflation rate in the coming months. A clearer statement on preventing a rapid depreciation of the rupee would have been specially welcome," said FICCI secretary general Rajiv Kumar.

"It is heartening to see that RBI finally giving some importance to supply side measures and talking about the need for raising the potential rate of growth through the implementation of structural reforms," said Kumar.

Some, however, were peeved about the latest interest rate hike.

"We urge the apex bank to remove supply side hiccups. We require to pace up production and manufacturing to support supply in the market," said Sanjiv Saddy, executive president, corporate affairs, Emaar MGf Land.

"It is our strong recommendation to RBI not to increase rates further as it will not help industry to come out of the quicksand. Rather it will further burden it and may finally become a reason for economic collapse," he added.

The real estate sector has been under pressure for some time as successive rate hikes made home loans costlier and demand remained subdued.