Mumbai: In a bid to tame the price rise by sucking excess money out of the system, India's central bank Friday hiked two major policy rates by 25 basis points each, a move that industry said could impact growth.
The repo rate now stands revised to 5 per cent and the reverse repo rate to 3.5 per cent, marking an end to the easy monetary policy regime of the Reserve Bank of India (RBI).
The repo rate is the interest charged by the RBI on borrowings by commercial banks. A hike in the rates makes cost of borrowing costlier for the commercial banks.
The reverse repo rate is the rate at which the central bank borrows money from commercial banks. A hike in this rate makes it more lucrative for banks to park funds with the RBI.
According to FICCI Secretary General Amit Mitra, the RBI action has come as a unpleasant surprise for the industry.
"Although the industrial growth has been the highest ever achieved by the economy, sustainability of growth is hugely dependent on the availability of credit at the right cost. As far as inflation is concerned, we have time and again stressed that this is a supply side phenomenon and the hike in interest rates would not help in beating inflation," he pointed out.
"Instead, along with rising inflation, a dent on growth will prove to be a double whammy for the industry, especially the manufacturing and the SME sectors," he added.
Accordng to CII, the RBI action could be seen in the context of the inflation situation.
"The concern of the RBI is understandable. However, given that the industrial recovery is still not broad-based, we would be watching very carefully the impact that the increase in benchmark rates would have on actual interest rates," said Chandrajit Banerjee, CII director general.
"The industry appreciates the tough balancing act that RBI is doing to strike a balance between the imperatives of strengthening growth and anchoring inflation," he added.
The RBI move comes against the backdrop of Finance Minister Pranab Mukherjee warning that India's inflation rate may return to double- digit levels this month if steps are not taken to contain the price rise.
"I will not be surprised if we have a double-digit inflation by March. We are primarily concerned with food inflation. It has to be tackled," Mukherjee told the Rajya Sabha during the discussion on the budget for 2010-11.
India's annual rate of infation, based on the wholesale price index, rose to 9.89 percent in February from 8.56 percent in the previous month.
Earlier this week, Planning Commission Deputy Chairman Montek Singh Ahluwalia had cautioned that policy makers must tread cautiously while seeking to tame inflation as growth was equally important.
"The balance between controlling inflation and protecting growth is an issue which the people responsible for short-term monetary policy have to take a look at. That is an issue I want the RBI to consider very carefully," Ahluwalia said.
"The inflation is getting much more into the worrying area," he told reporters.
Earlier on Jan 29, the RBI hiked cash reserve ratio by 75 basis points. By this, it was able to suck out Rs.36,000 crore ($8 billion) from the system.
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