Concerned over impact of further tightening of interest rates by the Reserve Bank of India, the industry said that the move could lead to an overall fall in the business confidence and investments may be impacted.
The Reserve Bank of India (RBI) today raised repo rate, the rate at which it lends to banks, by 50 basis points and cash reserve requirement by 25 basis points to moderate credit growth and contain inflation. The RBI expects the inflation rate, now hovering around 12 per cent, to come down to 7 per cent by March 31, 2009. Industry bodies Ficci, CII and Assocham said the supply-side constraints need to be addressed to contain inflation.
Industry body Ficci said with declining business confidence in the last three successive quarters and with the manufacturing sector growth coming down from 11.3 per cent in May, 2007 to 3.9 per cent in May, 2008, the RBI’s action could further exacerbate the declining confidence level and manufacturing sector growth.
“Given this environment, using these monetary tools could have a further negative impact on the southward movement of industrial activity”, said Amit Mitra, Secretary General, Ficci.
The RBI's policy responses to fight inflation was expected, though it may have been possible to await the lagged effects of the last round of monetary actions taken last month before taking these further steps.
“Concerns about sustaining growth in the environment of monetary tightening remain,” the chamber said. However, CII said its surveys have shown that industry's sentiment towards investment is still strong.
Assocham said the measures taken to combat the inflationary pressures could further underpin the slowdown in the economic growth. “The tightening of the money supply may lead to a fall in the overall business confidence with companies postponing their investment plans in the time to come,” said Sajjan Jindal, president, Assocham.
