Rates hike may dampen growth: FICCI

New Delhi: Expressing concerns over the increase in short-term lending and borrowing rates by 0.25 per cent, industry chamber FICCI on Tuesday said the move could slow down the growth momentum of the country.

"The increase in repo and reverse repo rates if translated into hike in interest rates could prove to be a dampener in the capital formation, employment generation and overall growth of the economy," FICCI President Saroj Kumar Poddar said.

In a move that may put pressure on housing and other consumer loans, Reserve Bank of India on Tuesday hiked its short-term lending and borrowing rates by 0.25 per cent.

The apex bank, however, kept unchanged the long-term rates at which it lends to commercial banks at 6 per cent in the quartely review of the Annual Statement on Monetary Policy.

Poddar said the Reserve Bank should have waited for at least a year before taking any decision to hike short-term interest rates.

"The economy is not overheated to the point. It is moving forward at a desirable pace. Perhaps this was not the correct time to hike the rates," Poddar said.

The FICCI President said that the interest rates are a strong signalling device and can control high inflation rates.

"But the current inflation rates are not showing signs of any concern," he added.

He said that the move could render new projects unviable as they were planned taking into consideration the existing interest rates.

Poddar expressed concern about the small and medium enterprise (SME) sector that are dependent on the debt market.

"Large enterprises can tap the domestic market and even raise money from international markets. But where will the SMEs go," he said, adding that the move would make debt funds more expensive.

The short-term rates - repo, reverse repo - were hiked by 0.25 per cent to 7 per cent and 6 per cent, respectively, even as the bank kept the Cash Reserve Ratio unchanged at 5 per cent.

RBI has retained the projection of 7.5 to 8 per cent growth for the economy and kept inflation forecast intact at 5 to 5.5 per cent.

The apex bank had effected a similar 0.25 per cent hike in repo and reverse repo rates about six weeks back on June 8.

The repo rate is the rate at which RBI lends to banks in the short-term to manage liquidity in the system, while the reverse repo is the rate at which the apex bank borrows from banks to suck out excess liquidity from the system.