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Wednesday, September 14, 2011

Soaring Inflation augurs well for another policy rate hike

The inflation figure for the month of August climbed to 9.78% against the July figure of 9.22 %, and to bring it to the comfort level of 6%, RBI shall have to come out with another policy rate hike on September 16, 2011. Market has already discounted the hike of 25 basis point and RBI hiking more than that shall give the jittery rides to the capital market.
Hike in policy rates, increases the cost of the debt and is adverse for the businesses particularly capital goods, automobile and real estate ones. Investment in real-estate and automobiles is generally backed by loans and loans become dearer due to higher interest rates engendering due to the hike in the policy rates. Businesses have to defer capacity expansion plans and demand from the consumer and businesses also decreases.
Rising policy rates have a negative impact on the growth of the economy, and government needs to find some amicable solution to deal with the inflation.

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