RBI's move to hurt industry, derail projects: India Inc

India Inc on Thursday expressed fear that the Reserve Bank of India’s decision to raise key short-term rates would push up the cost of borrowing, making some of their projects unviable and hurting expansion plans.

Confederation of Indian Industries said, “With banks already raising their lending rates, we are concerned that the industry may find it difficult to fund capacity expansions and even some existing projects may become unviable.”

As part of its first-ever mid-quarter review of monetary policy, RBI upped the short-term lending (repo) rate by 25 basis points and borrowing (reverse repo) rate by 50 basis points to six per cent and five per cent, respectively.

The decision was guided by the need to contain inflation, which is currently at 8.5 per cent, as well as 15.1 per cent food inflation in the week ended September 4, as a hike in rates will lead to a rise in the cost of funds for banks and will make loans more expensive. This, in turn, will reduce consumption.

“If banks are unable to absorb the cost and pass it on to the customers, it will have an impact, especially on weaker borrowers like small and medium enterprises,” Ficci Secretary General Amit Mitra said.

On the other hand, Mitra said increasing the reverse repo rate by 50 basis points was tantamount to asking banks to give more money to RBI, rather than lend to potential investors.

“This, in turn, will definitely deter investment at the margin,” he added. Another industry chamber, the PHD Chamber, also said: “RBI’s decision will adversely impact the cost of borrowing by the industry from the banks, especially by the SMEs. It may also the cost of home loans, as well as consumer loans. The export sector is also likely to be affected.”

However, Assocham President Swati Piramal said the outcome of the mid-quarter review of monetary policy undertaken by RBI was in line with the predictions of the industry.

“The industry has been expecting the RBI to raise the repo and reverse repo rates and leave the cash reserve ratio untouched as the economic conditions are still evolving,” Piramal said.

Mitra said the chamber was hopeful that this is the last such quarter of restrictive action towards growth and said it hoped to see the policy eased in RBI’s next review.

Echoing Mitra’s sentiment, Piramal said: “The increase in repo rate and reverse repo by 50 basis points clearly indicates that this may be the last of rate hikes for the time being.”