RBI hikes key rates 50 bps to fight inflation

The Reserve Bank of India (RBI) raised interest rates by a higher-than-expected 50 basis points on Tuesday, stepping up its fight against persistently high inflation despite slowing growth in Asia\'s third-largest economy.

The Reserve Bank of India (RBI) increased the repo rate, at which it lends to banks, to 8 per cent, exceeding market expectations that it would raise rates by 25 basis points.

The rate increase is its 11th since March 2010, making the RBI one of the most aggressive inflation fighters among central banks.

Still, wholesale price index inflation was 9.44 percent in June, more than double the central bank\'s comfort level, and high prices are expected to persist in coming months.

The central bank, whose forecasts for inflation have proven optimistic in recent quarters, increased its outlook for wholesale inflation at the end of the fiscal year in March to 7 percent, from 6 percent earlier.

Considering the overall growth and inflation scenario, there is a need to persevere with the anti-inflationary stance, RBI Governor Duvvuri Subbarao wrote in his quarterly policy review.

The RBI stuck with its forecast for economic growth in the current fiscal year of around 8 percent. While some interest-rate sensitive sectors are showing signs of moderating growth, it said, there is no evidence of a sharp or broad-based slowdown as yet.

All 23 analysts in a Reuters poll last week had expected the RBI to raise rates by 25 basis points on Tuesday, although 9 of them expected a pause in the tightening cycle after July amid signs of slowing domestic growth and global uncertainty.

Recent industrial output and manufacturing data was the worst in nine months, while sales of cars have slowed sharply and loan demand is easing, complicating the central bank\'s inflation-fighting task.

Subbarao said Tuesday\'s policy actions are expected to maintain the credibility of the commitment of monetary policy to controlling inflation.

The measures are also expected to reinforce the point that in the absence of complementary policy responses on both demand and supply sides, stronger monetary policy actions are required, Subbarao said in his report.

January-March quarter growth was a worse-than-expected 7.8 percent, with economists expecting India to grow at 7.9 percent in the fiscal year that began in April, according to a Reuters poll, less than the 8.5 percent growth in the fiscal year that ended in March.

Following are views of industry officials:

SUSHIL MAROO, GROUP CFO, JINDAL STEEL AND POWER

It will curtail demand for steel products as interest rate sensitive sectors such as housing and auto will slow down.

It's going to affect investments in new projects as feasibility of new projects will severly be dented because money is becoming expensive. Our projects, though, will not get impacted as they are long-term projects and immediate capex requirement is low.

R RAMAKRISHNAN, EXECUTIVE DIRECTOR, BAJAJ ELEC

We are seeing demand showing some signs of slowing down and 50 basis points is definitely likely to impact liquidity. The RBI should focus more on supply side management rather than just focus on curbing the demand side. This decision will definitely impact corporates and also the consumption of products.

VYOMESH M SHAH, MANAGING DIRECTOR, ACKRUTI CITY

This will definitely lead to increase in costs at the consumer's end as banks are likely to increase interest rates. This would also lead to an increase in borrowings for builders, but how much it will impact the final price is to be gauged.

SANTOSH SINGHI, CFO, AMTEK AUTO

The rate increase is beyond our expectations and the industry is hoping that this would be the last increase for some time to come. There is already a negative sentiment in the sector and today's announcement will not go down well with either the consumers on the retail side or the corporates for whom credit offtake has been slow.

SUNIL SIKKA, PRESIDENT, HAVELLS INDIA

This is unfortunate. They have been doing it for last few months, and we thought 25 basis points could be okay. But they have not been able to tackle inflation so far.

As far as we are concerned as an organization, on the borrowing side, it does not affect us at all because we are a debt free company. But coming to the demand side, demand of housing will go down, which in turn means demands for our domestic installation categories will go down. But RBI has not been able to check inflation so far, so I think they had no other way to tackle this, but this will certainly dent demand.

SHAILENDRA CHOUKSEY, DIRECTOR, JK LAKSHMI CEMENT

Demand for cement continues to languish. With the stance RBI has taken, it will be difficult to revive the realty sector and therefore demand for cement.

We are hopeful of medium and long-term growth of Indian economy and so are not changing our expansion plans.

ARVIND PAREKH, DIRECTOR, JINDAL STAINLESS

This was definitely higher than expectations but RBI is trying to stay ahead of the inflation curve even if it is at the cost of growth. Demand has most certainly taken a hit and even production costs will go up all around as borrowing costs will increase.

We are strongly hoping that this will be the last increase the RBI will do as there has been some easing of inflation in the past month

M.S. UNNIKRISHNAN, MANAGING DIRECTOR, THERMAX

We are already seeing a slowdown and moderation in the order intake. Investor confidence is going to further reduce with increased repo and reverse repo rates. The government is aware that this is going to reduce investments and GDP growth.

VIPUL JAIN, MANAGING DIRECTOR, KALE CONSULTANTS

I think the domestic business--the Indian market--is turning into a significant market for the IT industry. If there is less capital investment, if the cost of borrowing is higher, then it will slow down the domestic industry, which could indirectly impact IT companies.

PRADEEP JAIN, CHAIRMAN, PARSVNATH DEVELOPERS

This would impact the input cost of the real estate sector. With the result of the increase in cost of funds, I don't foresee any large concern for the real estate sector, except the burden on individuals on further increase in cost of funds and value of properties. The developer has no option but to pass it on to the buyer.

NIKHIL NANDA, JOINT MANAGING DIRECTOR, ESCORTS LTD

It is unfortunate that interest costs are going up. It will lead to increase in various costs in terms of input costs, in terms of liquidity flow and more importantly, from the customers point of view. So my concern is more from the consumption side and this is across various segments be it cars, motorcycles and tractors. Since the interest rates have gone up by 50 basis points, any manufacturer will add the costs over a period of time and pass them to the customer.

Source: Financial Express