RBI move to hurt economic growth: FM, India Inc

Finance Minister Pranab Mukherjee on Tuesday admitted the Reserve Bank of India's move to hike short-term lending and borrowing rates will hurt growth in the near-term, but exuded confidence that economic expansion will gather pace later as a consequence.

Meanwhile, India Inc too expressed apprehensions that the RBI's decision could lead to higher interest rates and impact the growth momentum of the economy.

Mukherjee said the RBI took the decision at a difficult time, when the economy is still witnessing high prices and some slackening of industrial growth.

"This tightening may have some negative impact on the growth rate, but I expect such an effect to be only a short one. In the medium to long-term, the changes announced by the RBI today should actually help the Indian economy do better in terms of growth," Mukherjee said in a statement in New Delhi.

"Today is not such an easy time. The signals from the economy have been mixed. Industrial growth showed a slight slowing down in August. Inflation, while less than what it was some months ago, is still not in a zone where we can sit back," he added.

Inflation moderated to 8.62 per cent in September, but is still above the comfort level of 5-6 per cent. Food inflation has also declined and stood at 13.75 per cent for the week ended October 16.

Industrial growth, on the other hand, slowed to a 15-month low of 5.6 per cent in August. Recent output figures for the core sector also paint a dismal picture.

Growth of the six core sector industries, which have over 26 per cent weight in the index of industrial production, fell to an 18-month low of 2.5 per cent in September.

The finance minister said," I respect this (RBI) decision made in a difficult time. This will create the monetary tightening in the country without narrowing the LAF corridor."

The RBI upped short term lending (repo) rate and borrowing (reverse repo) rates by 25 basis points each, thereby maintaining the difference between the two rates, known as the liquidity adjustment facility (LAF) corridor, unchanged at 1 per cent.

Industry chambers Ficci, CII and Assocham asked the Reserve Bank to strike a good balance between maintaining the country's growth and managing inflation.

"The move could have an impact on interest rates and the cost of borrowing, which in turn could affect areas which are still to pick up and come full stream," Ficci secretary general Amit Mitra said.

Echoing Mitra, Assocham president Swati Piramal said that the policy rate hikes are likely to increase lending as well as deposit rates of banks immediately.

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.

In the RBI's mid-year policy review, it announced an increase of 25 basis points in key short-term lending and borrowing rates to 6.25 per cent and 5.25 per cent respectively, to tame high inflation.

Headline inflation stood at 8.6 per cent for August, while the food inflation at an elevated 13.75 per cent for the week ended October 16.

The RBI retains GDP growth forecast at 8.5 per cent for 2010-11. In the first quarter of 2010-11, the economy grew at 8.8 per cent.

Ficci said the policymakers' focus be on extending growth which would lead to greater employment.