Hike in key interest rate by the Reserve Bank of India today will hit the already weak investment momentum and impact India’s economic growth, India Inc has said.

“This has disappointed the industry especially as the investment climate continues to be weak and growth outlook remains muted as a high interest rate regime deters consumption and investment demand,” CII Director-General Chandrajit Banerjee said.

RBI hiked the short-term lending (repo) rate by 0.25 per cent as part of efforts to tame inflation — a step that will make corporate and consumer loans more expensive.

RBI Governor Raghuram Rajan, in the first full policy unveiled by him, increased the repo rate to 7.75 per cent, but cut the cost of short-term funds for banks by slashing the marginal standing facility (MSF) rate by a similar quantum to 8.75 per cent.

CII said RBI could have refrained from affecting the hike as the industry is reeling under the pressure of high cost of capital and low availability in a tight liquidity situation.

FICCI Secretary-General A. Didar Singh said: “Given the slowdown in economic growth, weakening pace of investment activity and downswing in consumption, we were hoping that the RBI would steer focus towards supporting growth that is so essential for employment generation in the economy.”

Industry is certainly disappointed over the increase in repo rate, he added.

“The kind of inflation we are witnessing in India is more of a supply-side phenomenon. While raising interest rates would have little impact on such inflation, it will certainly penalise Indian industry that is already in the midst of a slowdown,” Singh said.

High food prices, especially of onions and some other vegetables, pushed up the Wholesale Price Index (WPI) inflation to a seven-month high of 6.46 per cent in September.

The industry is apprehensive that the rate may be raised again if inflationary pressure continues.

Assocham President Rana Kapoor said the hint is rather clear from Rajan’s statement which reads: “On inflation, both wholesale and consumer price inflation is likely to remain elevated in the months ahead, warranting an appropriate policy response.”

Assocham said although the repo rate hike by 25 basis points was expected by the markets, the worrying part for the industry is the outlook and the hints in the policy that in the wake of elevated inflation, the interest rates may be revised again.

CII said, however, the reduction in MSF rate would help banks to reduce short-term interest rates and enhance their lending operations during the busy season, especially at a time when there is a significant reduction in the flow of funds to productive sectors of the economy.

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