Interest rate hike will delay economic growth recovery: Experts

The Reserve Bank of India's decision to hike key policy interest rates by 0.25 percent will delay economic growth recovery, languishing at a decade low, experts and industry representatives said.

"The monetary policy statement of RBI announcing a 25 basis point rise in repo rate has disappointed industry," said Sidharth Birla, president of industry body FICCI.

Birla pointed out that factory output has been in the negative terrain in the recent past and interest rate sensitive sectors like consumer durables, automobiles and housing and construction have taken a major hit.

"At this juncture we need policy support from all directions to get the industrial sector back on track. We hope growth and employment considerations merit greater attention in RBI's policy decisions in the coming months," he said.

In third quarter review of the monetary policy the RBI Tuesday hiked key policy interest rates by 0.25 percent.

The repo rate that banks pay when they borrow money from the RBI to meet their short-term fund requirements, was increased to 8 percent from 7.75 percent per annum.

The reverse repo rate that the RBI pays to commercial banks when they park their surplus short-term funds with the central bank, has been adjusted to 7 percent.

These rates determine the lending and borrowing norms of commercial banks, thus affecting the equated monthly installments (EMIs) on home, automobile and other loans.

Saying that the rate hike would not help much in curbing inflation, the Confederation of Indian Industry (CII) advocated the need for shift towards an accomodative monetary policy stance, sooner rather than later.

"This is an opportune time to accord a precedence to growth over inflation especially as prices are trending downwards, core inflation is within the comfort zone of the RBI and inflationary expectations are not unduly high in view of a robust performance by the agriculture sector," said CII director general Chandrajit Banerjee.

Major real estate developers said the RBI move would hurt the sector already struggling due to high cost of finance and low demands.

Pradeep Jain, chairman, Parsvnath Developers said the RBI move is "highly disappointing".

"It is not going to help RBI curb inflation any more. In fact, in its fight with inflation... we were actually expecting a rate cut instead from the apex bank which would have infused some positive vibes in this sentiment driven market," said Jain.

"This move by RBI would encourage banks to increase their lending rates which is already beyond reach," he said.

"This step by RBI would encourage banks to raise their lending rates, thereby impacting buyers' decisions," said Aman Agarwal, director, KV Developers.

"RBI should understand that without a flexible credit facility, it will be difficult for this sector to grow. We appeal RBI to revise its decision in its next policy review," Agarwal said.

"While the move is a measure to tackle inflation, the pressure on loans will increase with chances of the banks hiking the home loan rate to pass the pressure on to the customers. However, with the demand for good quality homes picking up and the trend expected to continue, we do not expect the rate hike to impact our sale substantially," said Abhay Kumar, chairman of GrihaPravesh Buildteck.

Harsh Pati Singhania, director, JK Organisation said: "In the present situation, where growth is low and inflation is showing signs of easing, one would have expected RBI to maintain status quo rather than increasing the policy rates. It is important to keep in mind that inflation in India is largely a result of supply side constraints which requires greater investments in capacity building and productivity, and therefore higher interest rates are bound to have long term consequences for growth."