Reserve Bank of India’s move to increase its policy rates may have impact on the growth of economy and consumption demand, as it will cause to increase the borrowing costs by the industry from the banks, especially, by the SMEs.
In addition to these increase in borrowing costs, steep fall in the industrial production is also a major worry for the industry. The PHD chamber reported that further changes of monetary measures through hike in repo rate by 25 basis points from 6.5 – 6.75% may further increase the banks borrowing costs, which in turn increases the cost of borrowing by the industry form banks, especially SMEs.
The increase in reverse repo rate from 5.5 to 5.75% by increasing the basis points by 25, will result in parking more funds of banks with RBI and reduces liquidity from the banking system, which will impact the availability of the funds with banks, that give credit to industry.
Growth rate of industry has declined to 2.5% in December 2010 (from 18% last year) and 3.7% in January 2011 from (16.8% last year). If this situation continues, after few months the industry growth may slide, which will impact overall GDP growth.
This monetary tightening which has been carried out over the last one year, did not effect the inflationary scenario. Inflation is found to remain significantly above (at 8.31% during Feb2010) the comfortable zone. Experts say that tight monetary policy is not an effective tool to control inflation, as it is due to structural side constraints.