Macroeconomic indicators - RBI rate hike may hit factory output

Apex chamber ASSOCHAM said the Reserve Bank of India's calibrated approach with minimal risk to growth momentum by increasing its repurchase rate by a quarter point appears to be a fire fighting exercise with limited options. The Associated Chambers of Commerce and Industry of India The 25 basis points increase in short term lending and borrowing (reverse repo rate) in RBI's mid term policy review will hit the manufacturing sector which is already witnessing a slowdown due to rising input costs and wages. Mr Dilip Modi president of ASSOCHAM said that "This is the eighth time in 2010-11 that the central bank has raised key policy rates to cool prices. The demand-side inflationary pressures are a larger concern than risk to overall economic growth."  He said Indian industry is already facing fluctuating crude oil prices due to Middle East crisis, threats of disruption in global supply chain because of the devastating earthquake and tsunami in Japan, besides uncertain recovery in the European Union and the United States after the economic meltdown. With inflation hovering at 8.31% in February and profit margins under squeeze, capacity expansion plans are being curbed, thereby restricting fresh investments. Mr Modi said the RBI should have waited till the new agriculture crop which is expected next month. He said that "The performance of capital goods sector is also a matter of concern as it has shown negative growth for the second consecutive month." Meanwhile, ASSOCHAM is advocating a single policy rate to improve monetary policy transmission. This will align the Indian monetary system with international best practices and swifter transmission of monetary policy instances. Mr Modi said that “We agree with the RBI panel recommendation that repo rate should be a single policy rate to unambiguously signal monetary policy stance to achieve macro-economic objectives of growth with price stability. This will also bring in more effectiveness and transparency in the banking system.”