RBI Rate Hike to Impact India Businesses

Rate hike by the Reserve Bank will increase the cost of doing business and impact capital expenditure by India Inc, industry body CII warned Wednesday.

“The cost of doing business goes up because of the hike and it will impact capex (capital expenditure) by the industry,” Confederation of Indian Industry president and vice-chairman of Bharti Enterprises, Rakesh Bharti Mittal, told reporters in Mumbai, PTI reported.

He was, however, quick to add that the normal monsoon and supply side measures will have a cooling effect on inflation and help restrict the rate hikes to just the one taken earlier this month.

The industry has also promised a capex of Rs 50,000 crore ($7.4 billion) in the recent months, he said, adding that an uptick in capacity utilization levels to 80% can prod more industries to join the club.

The RBI may also look at cutting the recently implemented hike and returning to the “benign” rate environment once it sees comfort on the inflation front, he said.

With a focus on its core objective of keeping inflation in a targeted range in the medium term, the central bank had hiked repo rate, or the rate at which it lends to the banks, by 0.25% this month.

Many lenders had increased their lending rates prior to the policy review and after that as well, indicating a broader direction in which the rates are headed.

Kotak Mahindra Bank’s managing director and chief executive, Uday Kotak, who is also the president-designate for CII, said the RBI is responding to the risks that it is anticipating by keeping in mind its inflation targeting objective.

He added that the apex bank has done a “balancing act” by keeping the stance of the policy at neutral which allows for any reversals in rates.

Meanwhile, Mittal flagged availability of credit as a worry, stating that smaller businesses, which will get affected, are the ones that need attention at present.

He said 11 banks under the prompt corrective action framework, which puts restrictions on normal lending activities, reduces their ability to support the needs of growth.

In its post-policy commentary, the RBI had said the prospects on growth appear to be improving, with the GDP clocking a 7.7% expansion in the March quarter.

While expressing optimism on the jobs outlook, Mittal said the introduction of GST and demonetization by the government led to the loss of 1.5 million jobs, but noted that there has been high job creation in the informal sector which is not being counted.