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Rate hike to hit growth in fourth quarter, says India Inc

The central bank will conduct a midquarter review of its monetary policy for fiscal 2010-11 on Thursday amid concerns over a continuing price rise that has pushed up the inflation rate.

Mail Today Bureau        Last Updated: March 16, 2011  | 13:13 IST

India Inc is worried over the Reserve Bank of India (RBI) going in for a further hike in key interest rates to rein in inflation as it fears that this would adversely impact the growth of the manufacturing sector, which is already showing signs of slowing down.

The central bank will conduct a midquarter review of its monetary policy for fiscal 2010-11 on Thursday amid concerns over a continuing price rise that has pushed up the inflation rate.

However, India Inc feels that any further rate-hike will hit industrial growth in general and the manufacturing sector in particular.

According to the Federation of Indian Chambers of Commerce and Industry (Ficci), the growth of the manufacturing sector has decelerated in the fourth quarter due to high interest rates.

"The most important factor for moderation in growth (manufacturing sector) was the rise in the cost of capital due to monetary tightening measures introduced by the Reserve Bank of India," according to a Ficci manufacturing survey released on Tuesday.

 FEAR PSYCHOSIS

Another hike in key rates by RBI to rein in inflation may adversely impact the growth of the mfg sector, which is already showing signs of slowing down

RBI hiked interest rates in Jan this year by 0.25% and accordingly its shortterm lending rates to banks (repo and reverse repo) stand at 6.5% and 5.5%, respectively

The Central bank will conduct a mid-quarter review of its monetary policy for fiscal 2010-11 amid concerns over a continuing price rise that has pushed up the rate of inflation
Over 77 per cent respondents in the survey felt that the growth of the manufacturing sector will moderate in the fourth quarter on account of high borrowing rates.

"In quarter four, over 34 per cent of respondents said that their cost of borrowing has increased significantly in the last two to three months. About 43 per cent respondents felt that the hike in policy rates had a moderate impact on their cost of borrowing," the survey said.

In the manufacturing sector, the growth in the chemicals, forging and tyre segments may moderate at five to 10 per cent, while sectors, such as cement, paper, steel, metals and textiles are likely to witness low growth of less than five per cent, the survey claimed.

RBI hiked interest rates in January this year by 0.25 per cent and accordingly its shortterm lending rates to banks (repo) and the rate at which it borrows from banks (reverse repo) stand at 6.5 per cent and 5.5 per cent, respectively.

As a result, bank loans have turned costlier with domestic banks revising their lending rates upward both for corporates and consumers. Business chambers feel any further rate hike will not help control the inflation but will choke the growth rate instead.

The prime lending rates of banks are in the range of 12.75 per cent and 13 per cent. With inflation moderating in recent weeks, Ficci has urged the RBI not to hike rates as it would impact growth of the manufacturing sector.

According to the Assocham, "The choice of monetary action with continued fiscal profligacy has so far not resulted in desired benefits. The government needs to get down to the core of the issue and take necessary action." "Input costs and wages have topped up in India, squeezing profit margins in the manufacturing sector," Assocham said.

Ficci is of the view that a rate hike will not control inflation. Instead the Centre should improve supplies by supporting the manufacturing sector, which will ease inflation in the long run.

Assocham has recommended that RBI postpone raising rates till the new crop, expected by March-April, hits the markets.

Courtesy: Mail Today

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