Further rate hike by RBI to impact growth

A week ahead of the RBI reviewing the monetary policy with expectations of a policy rate hike, Commerce and Industry Minister Anand Sharma has cautioned that raising cost of borrowing "may not be suitable" tool to rein in inflation.

Making out a strong case for easy finance to the industrial sector, in a letter to Finance Minister Pranab Mukherjee, Sharma said that industrial growth has already plunged to an 18-month low of 2.7 per cent in November 2010.

"The high inflation in primary articles, particularly, vegetables are more on account of supply side constraints and monetary policy may not be the most suitable intervention to deal with the situation," he said.

While he appreciated concerns on inflation, the minister said, "Industrial sector clearly needs sustained support to enable complete recovery".

The Reserve Bank of India (RBI) is scheduled to announce its quarterly policy review on January 25. There are wide anticipations that the central bank in its third quarter monetary policy review will raise the key policy rates by at least 25 basis points in the wake of soaring inflation.

High food inflation has been a major concern for the government. Rising food prices have pushed up inflation to 8.43 per cent in December last year.

Food inflation stood at a high level of 16.91 per cent in the first week of January, after touching a 18.32 per cent in the last week of December 2010.

"A selective restriction on credit may be necessary to check inflationary pressures, but the imperative of easy credit flow for industrial sector, especially the infrastructure and manufacturing is crucial for the economy," the minister added.

The minister said that the capacity addition has not been at an appropriate level to ensure the sustained targeted growth in Gross Domestic Product (GDP).

The government is expecting that the country's economy would grow by 8.75 per cent in the current fiscal. "... capacity addition has been much below the 11th Plan targets in power, roads and other infrastructure sectors," he added.

RBI has raised short-term rates six times last year to check inflation.