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Rediff.com  » Business » India Inc disappointed by repo rate hike

India Inc disappointed by repo rate hike

Last updated on: September 20, 2013 15:34 IST

Expressing disappointment over the hike in repo rate by the RBI, India Inc on Friday said a rate cut by the bank would have helped ameliorate sentiments as businesses are "reeling" under a tight liquidity crunch due to high cost of capital.

"High interest rate has been identified as a major barrier to boosting growth. The increase in the repo rate has come as a surprise to us. While 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 going forward," Ficci President Naina Lal Kidwai said.

Maintaining its hawkish stance, RBI today unexpectedly raised the policy rate by 0.25 per cent as it kept its focus on controlling inflation, which it felt would be above the expected levels in the current fiscal.

"The increase in repo rate could have been avoided as industry is already reeling under pressures of high cost of capital and low availability in a tight liquidity situation.

Industry would have liked reduction in headline rates," CII Director General Chandrajit Banerjee said. The repo rate or the short term lending rate has been increased by 25 basis points to 7.5 per cent from 7.25 per cent with immediate effect.

"Contrary to expectations, the RBI has chosen to further tighten the monetary stance giving a clear signal that fighting inflation is its core priority. RBI Governor Raghuram Rajan has acted in a cautious manner, the financial markets were perhaps expecting too much from him," Assocham President Rana Kapoor said.

Rajan, in his maiden policy review, however, eased liquidity though a reduction in the marginal standing facility rate, at which banks borrow from the central bank, by 0.75 per cent to 9.5 per cent.

"The reduction in MSF by 75 bps is encouraging as this is working as the short term interest rate," Banerjee 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 per cent.

"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.

At the same time, the RBI reduced the minimum daily maintenance of CRR from 99 per cent of the requirement to 95 per cent effective from September 21, a move aimed at inducing liquidity into the system.

"More worrisome is a liquidity crunch which is being witnessed and which may lead to further hardening of interest rates. State Bank of India has already done it and our worry is that more banks may follow suit," Kapoor said.

"Industry will have to take the brunt of this rate hike, especially the infrastructure sector which is quite stressed at the moment.  Industry is truly concerned about the policy rate hikes and their adverse impact on the investment sentiment," Srei Infrastructure Finance Limited said.

"Although the RBI has attempted to boost liquidity by reducing the MSF and the minimum daily maintenance of CRR, this may not necessarily promise the industry a turnaround in growth prospects in the near future," Partner at Deloitte Haskins & Sells Atul Dhawan said.

The markets reacted negatively to the RBI's policy announcements, with the Sensex tanking by about 379 points and the rupee depreciating 39 paise to 62.16 against the dollar in the late afternoon trade.

"Raising the repo rate has been contrary to expectations, given the weak investment scenario. Going ahead, stability and gradual appreciation in rupee along with moderation in inflation will provide room for the RBI to ease the policy interest rate," Senior Economist at Dun & Bradstreet India Arun Singh said.

"High expectations from the RBI Governor to provide all the solutions to the ailing Indian economy are grossly misplaced and unrealistic. The Governor has stuck to his mandate of managing the monetary risks which continue to be highly prone to inflationary and currency devaluation risks," Executive MD at Cushman & Wakefield Sanjay Dutt said.