Business Today

Industry may feel pinch of high rates

India Inc says the increase in short-term lending and borrowing rates by the RBI could adversely impact the country's industrial growth rate.

Mail Today Bureau   New Delhi     Last Updated: November 3, 2010  | 08:31 IST

India Inc on Monday said the increase in short-term lending and borrowing rates by the Reserve Bank of India (RBI) could adversely impact the country's industrial growth rate.

"The persistent hikes in rates (repo and reverse repo) by the RBI can pose a further challenge to industrial growth," Ficci secretary general Amit Mitra said. The central bank has raised these rates for the sixth consecutive time this year.

"This, in turn, would adversely impact the interest sensitive sectors like consumer durables and auto, which have led the growth hitherto and also dampen housing demand," Mitra said.

He said although RBI has hiked rates on account of high inflation this move could seriously impact consumption demand.

The Confederation of Indian Industries (CII) and the Associated Chambers of Commerce and Industry of India (Assocham) also said the RBI move could lead to higher interest rates and impact the growth momentum of the economy.

The chambers asked RBI to strike a balance between maintaining the country's growth and managing inflation. Assocham president Swati Piramal said the policy rate hikes are likely to immediately hike lending and deposit rates of banks.

However, CII was of the opinion that the banks would not immediately raise the lending rates. "We are reassured by the RBI's statement that it is unlikely to increase rates again in the near future," CII director general Chandrajeet Banerjee said.

The country's exporters are worried over the interest rate hike. The Federation of Indian Export Organisations (FIEO) president A. Sakthivel said the hike in the reverse repo rate would increase the rate of export credit for the second time in recent months.

He said that with overall inflation barely receding to single digit levels (9.8 per cent) but continuing to remain much above the comfort zone, a hike in policy rates was in the offing. He said that with another bout of increase in policy rates, the interest rate differentials would be much higher and more attractive for arbitrage flows. As a result, announcements of the US Federal Reserve later this week must be closely monitored, he added.

The real estate industry feels that the rate hike by RBI will not have any major impact on the sector. However, experts feel that the move may help control the steep rise in home prices seen over the last six months.

RBI in its second quarter review said that while prices in Mumbai in the last three quarters have been showing moderate growth, prices in Delhi and Bangalore have gone up at a faster rate. According to RBI, loans to the commercial real estate sector have risen by 10.4 per cent or Rs 9,604 crore, to Rs 1,01,662 (outstanding loans) as on September 24, 2010, which policy makers thinks need to be curbed.

According to Pradeep Jain, chairman, Parsvnath Developers, RBI's move will help control the bubble that is beginning to form in some big cities.

Courtesy: Mail Today 

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