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The RBI's decision to raise the key repo rate has disappointed the industry, which said it's a double whammy that will hit growth momentum and businesses already facing a credit crunch.
"The increase in repo rate could have been avoided as the industry is already reeling under pressures of high cost of capital and low availability in a tight liquidity situation," CII Director-General Chandrajit Banerjee said. "Industry would have liked a reduction in headline rates."
Reserve Bank of India Governor Raghuram Rajan today unexpectedly raised the policy rate, keeping its focus on controlling inflation, which it expects will be above projected levels in the current financial year.
"The monetary policy stance needs to take into account the lack of growth momentum in the industrial and services sector along with sluggishness in domestic consumption," Assocham President Rana Kapoor said. "Normalisation of monetary policy by the RBI, in the form of cuts in the repo rate, is a necessary condition for improving sentiment and providing a fillip to economic growth momentum."
The repo rate, or the short-term lending rate, was raised by 25 basis points to 7.5% with immediate effect.
"High interest rate has been identified as a major barrier to boosting growth," FICCI President Naina Lal Kidwai said. "The increase in repo rate has come as a surprise to us. While the industry is disappointed, reduction of interest rates charged and availability of credit remain a plea and we are confident RBI will keep this in their sights."
Softening of monetary policy is needed as it will lead to consolidation and stability in the sagging economy and pave the way to resume growth, said PHD Chamber of Commerce and Industry President Suman Jyoti Khaitan.
Rajan, in his maiden policy review, also partially eased liquidity-tightening measures though a reduction in the marginal standing facility (MSF) rate, at which banks borrow from the central bank, by 0.75% to 9.5%.
"The reduction in MSF by 75 bps is encouraging as this is working as the short-term interest rate," Banerjee said.
Engineering exports body EEPC said it felt "let down" by the repo rate hike.
"High interest rates, coupled with high inflation are adding to the pressure on the cost of manufacturing and making Indian exports uncompetitive," EEPC India Chairman Aman Chaddha said.
Rajan kept the cash reserve ratio (CRR), the portion of deposits that banks are required to maintain with the RBI in cash, unchanged at 4%. It lowered the minimum daily maintenance of CRR to 95% from 99%.
"The RBI has admitted that industrial activity continues to remain sluggish and even consumption demand is now starting to weaken in the economy. In such a scenario, a positive signal by way of a cut in the repo rate would have helped perk up sentiments," Kidwai said.
"The main area of concern for the industry is the external sector, which will remain volatile due to oil prices and reduced demand from global markets. For manufacturing to recover appreciably, the government needs to address structural issues in the economy," said P K Ghose, Executive Director and CFO of Tata Chemicals.
Yesterday, the State Bank of India, the country's largest lender, hiked its base lending rate by 10 bps to 9.8% as well as term deposit rates.
