India Inc unhappy with RBI rate move

Say move would affect growth momentum
Last Updated : 16 September 2010, 15:00 IST
Last Updated : 16 September 2010, 15:00 IST

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Unveiling its latest monetary policy the RBI raised the two key policy rates— short-term lending (repo) rate and borrowing (reverse repo) rate—it kept Bank Rate, Cash Reserve Ratio (the portion of deposits that banks are required to keep with the central) and Statutory Liquidity Ratio (the portion of deposits that banks have to park in government securities) unchanged.

Reacting to RBI’s policy moves, Ficci Secretary General Amit Mitra  said “while the heart of RBI is in the right place, with clearly stated intention to control inflation without disrupting growth, the policy action taken today raises concern about the likely direction of growth trajectory.”

Cost of borrowing

“The increase in the reverse repo rate by 50 basis points is tantamount to incentivizing banks to put more money in RBI’s coffers as against lending more to potential investors.

This is not a growth related signal and will deter investments at the margin. The increase in repo rate by 25 basis points is again a signal to banks to raise the cost of borrowing”, he added. “Ficci feels that these twin moves are not quite consistent with the spirit of not disrupting growth… These moves are perhaps a little harsh given the spirit and letter of

RBI own perspective of not disrupting growth parameters,” he said. Hoping this is the last tranche of “such restrictive” monetary action, Mitra said “We urge that business confidence which has been adversely hit today will be encouraged by reversing this restrictive policy in the next round.”

In a guarded reaction CII said sustaining the current growth rate would require a moderate interest rate environment.  With banks already raising their lending rates, CII expressed concern that the industry might find it difficult to fund capacity expansions and even some existing projects may become unviable.  CII hoped that that the RBI would pause in the second quarter review of monetary policy slated for October.

PHD Chamber, also said, “the RBI’s decision will adversely impact the cost of borrowing by the industry from the banks, especially by the SMEs. It may also the cost of home loans, as well as consumer loans. The export sector is also likely to be affected.”

However, Assocham President Swati Piramal said the outcome of the mid-quarter review of monetary policy undertaken by the RBI is in line with the predictions of the industry.

“The industry has been expecting the RBI to raise the repo and reverse repo rates and leave the cash reserve ratio untouched as the economic conditions are still evolving,” Piramal said.

Published 16 September 2010, 10:18 IST

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