Tuesday’s hike in the repo rate — interest rate at which it gives money to banks — by 50 basis points by the Reserve Bank of India (RBI) is bound to hurt the industry badly and slow down the country’s growth. This is the 11th repo hike in past 16 months and, while announcing it, RBI Governor D Subbarao has given no indication that it will be the last. The immediate impact of it would be higher EMIs on home and car loans and the banks are bound to pass on the burden to the customers. A large, blue-chip company now will have to fork out at least 3.25 per cent more as interest than what it used to pay one-and-a-half years ago; for companies down the ranks, the increase is greater. The short and medium term-impact on some of the most leveraged sectors like infrastructure, real estate and finance would be debilitating.
It would be unfair to blame the RBI for this messy state of affairs. Subbarao himself pointed out that mere fiscal discipline cannot tame inflation in the absence of appropriate governmental actions addressing supply bottlenecks, especially in food and infrastructure sectors. His assertion that “the economy’s ability to grow rapidly for any length of time without provoking inflation is dependent on implementing policies, with corresponding resource allocations, which will allow the supply of various products and services to keep pace with demand,” is one of the most damning indictments of the government from the country’s central bank. It is high time the Centre addressed critical issues causing supply bottlenecks urgently and made bold moves. Since inflation in India is a product of higher crude and agro prices, mere interest rate hikes will be counterproductive. Instead of giving unwarrantedly large role to monetary policy inflation, the government must come out with concrete policy measures on the supply and demand side. In the absence of such measures, another repo hike may become inevitable before October when the RBI announces its second quarterly monetary policy review.