CRR, repo rate hike to impact corporates, mkts

Price rise and inflation continues to bog the UPA Government. And, these very concerns seem to have prompted the Reserve Bank of India (RBI) to hike the repo rate by 25 basis points to 7.75 per cent and the Cash Reserve Ratio (CRR) by 0.5 percent to 6.50 per cent.

The impact of the decision is many fold. All home and consumer loans across the board are bound to shoot up consequent to the RBI decision.

The latest hike would also impact the corporate sector that is seeking to access the debt market. The cost of funds for India Inc would also go up in a big way especially for small and medium enterprises that have no access to cheap funds abroad.

Further, the RBI Governor Dr Yaga Venugopal Reddy decision ahead of the annual monetary review is also aimed at curbing the appreciation in rupee vis-a-vis' the US dollar thereby hurting the export of goods and services expensive.

Thirdly, the latest round of hike in repo rate would only hit the profitability of banks and financial institutions that were grappling with the issue of rising cost of funds. While most banks are likely to pass the burden on to consumers, others may have to dip into their profits to keep the interest rates at current levels. -00.jpg

Fourthly, the RBI Governor's decision to further target manufacturing-induced inflation at 6.46 percent has come ahead of the crucial Uttar Pradesh assembly elections. The ruling coalition led by UPA Government seems to have clearly gone on defensive especially after the recent reverses faced in Punjab and Uttaranchal where the Congress was unseated.

Opposition led by BJP has launched a massive campaign across the country against the price rise and inflation especially in poll bound states like Uttar Pradesh and Delhi where civic polls are round the corner.

Fifthly, the RBI decision leading to hike in interest rates in the short term is bound to find reverberation in the stock markets beginning April 2. Monday will be the first trading day in the stock markets after expiry of the futures contracts today.

Sixthly, with rising interest rates that would blunt consumer demand, the macro-economic parameters are bound to be adversely impacted. The GDP growth figures may have to be revised downwards. Already most agencies have forecast the GDP growth for 2007-08 at much lower than the 9.2 percent reported for the current financial year.

The only redeeming feature in the decision is that the impact of interest rate hike would be felt on the corporates only in the next financial year.

The decision, according to RBI data, will suck out 19,500 crore from the system. This is definitely a belt tightening measure.

RBI according to sources has appraised the Prime Minister Dr Manmohan Singh before hiking the repo rate.

Interestingly enough the Finance Minister Palaniappan Chidambaram was singing a different tune on another round of interest rates.