RBI's repeated rate hikes hurting India Inc: Assocham

Reserve Bank of India's (RBI) repeated hikes in key policy rates is hurting Indian corporates as it increases their cost of production and squeezes profit margins, industry body Assocham today said.

It also asked the government to invest more in the infrastructure sector, besides reducing the wasteful expenditure as a means to curb rising inflation.

"If the economy continues to use monetary policy without fiscal consolidation of appropriate degree, higher interest rates will continue to fuel high cost of production and squeeze profit margins of India Inc," an Assocham study said.

The RBI has hiked its short-term lending (repo) and borrowing (reverse repo) rates eight times since March, 2010, with a view to tighten liquidity supply for curbing inflation. Its latest hike of 25 basis points each in repo and reverse repo rates was announced last week.

Assocham said the country is pursuing a high growth strategy even as it has to deal with high inflation on account of increase in price rise of food items and other commodities.

High interest rates, on account of increase in repo and reverse repo rates, will affect attractiveness of investing in the industry and deter future projects, it said.

The Finance Minister had in his Budget speech had stressed that rising inflation could be tackled without compromising on economic growth.

The study said a large part of the inflation problem stems from rising food prices that is caused due to supply shortage. Even though some food article prices are now cooling, the food articles index is still hovering at 10% from last year.

"This has spurred a more broad-based inflation in manufactured goods," Assocham Secretary General DS Rawat said.

Food inflation during the first week of March was 9.42%. Even headline inflation has been above 8%, since February, 2010.

Non-food manufactured products inflation rate jumped to 6.1% in February from 4.8% in January, the study said.

At the same time, the industrial production dropped to 5.5% in Q3 FY211 from 9.1% in the previous quarter.

The production trends of consumer non-durables display another growth challenge, with performance sliding to minus 1.9% in Q3 from 1.5% in Q2 FY11.

More worryingly, the growth in capital goods sector -- that reflects future industrial growth prospects -- has tumbled to to 6.9% in Q3 FY11 from 21.3% in Q2, the study said.

"This indicates not only the present sluggishness, but also a certain dip in the performance of industrial sector in the short-term mainly due to rising input cost," Rawat said.

He said the price stability objective continues to be elusive, despite monetary action.