Another RBI interest rate hike will hurt demand and pull down growth: Corporate India

MUMBAI: Members of Corporate India have told the Reserve Bank of India (RBI) that another increase in interest rate would hurt demand and pull down growth. They also urged the monetary authority to intervene in the currency market as a depreciating rupee could stoke inflation.

The views were spelt to RBI deputy governors and other senior central bank officials by a team comprising Godrej group chairman Adi Godrej, Hiranandani group managing director Niranjan Hiranandani, L&T chief financial officer R Shankar Raman, Crisil MD Roopa Kudva, senior officials of credit rating agencies and R Deora of the exporters' association FIEO, among others.

With the headline inflation number not softening, there is a widely shared perception that RBI may announce another rate hike when it presents the half-yearly monetary policy on October 25. There is a growing fear that higher interest rates may deal a body blow to growth and consumer sentiment.

Till now RBI has raised rates 12 times since March 2010. Even as interest high rates and commodity prices squeezed profit margins of companies, imports became expensive, with the rupee declining 10% against the dollar since August. While many felt that RBI should have sold dollar heavily to arrest the fall, the central bank preferred a wait and watch policy with the US currency gaining amid safe haven buying by institutions across markets.

At the meeting, Godrej and Hiranandani represented the industry bodies CII and Ficci, respectively. With loan demand beginning to shrink, last week, the bankers' lobby, IBA also urged RBI to pause on rate. The benchmark policy rate has gone up 350 basis points in the last 18 months.

But, the headline inflation number is nowhere close to RBI's comfort level. The central bank is targeting inflation at 6-7% by March but the inflation has remained above 9% for past several months. RBI senior officials will meet bank economists on Tuesday to understand their views on the economy and growth. Speaking to newspersons after the meeting, Hiranandani said the slowdown was clearly visible and higher rates were not helping to lower inflation.

"Interest rate hikes are working in reversal at this point of time and adding to the inflationary pressure. Credit availability for businesses as well as consumers drying up; this may push the economy into recession," he said. But HDFC Bank CEO Aditya Puri told a news agency that RBI may disregard representation by banks and go ahead with a rate increase.

Last week, IBA chief K Ramakrishnan said "capex has come to a halt and investment is not happening." Bankers are concerned because loan growth has slowed down and credit numbers reported by banks reflect disbursal of loans which were sanctioned earlier. They also fear that if rates continue to rise, small and medium-sized companies may default on loans.

Source: EconomicTimes