Automobile and Real Estate Sectors to get affected by Rise in Borrowing Cost
Cost of borrowing has gone up, as a consequence sectors sensitive to interest rates are likely to be affected relatively more than others. To tame inflationary pressure, the Reserve Bank has hiked key policy rates 11 times since March 2010 by a cumulative 325 basis points. This led to a rise in borrowing cost which in turn played a role in decelerating growth in industrial production.
The observed deceleration in growth in automobile and real estate sector also owes to higher prices arising from the market conditions. During the first quarter (April-June) this fiscal, the industrial output, as measured by the Index of Industrial Production (IIP), stood at 6.8 per cent as against 9.6 per cent in the corresponding three-month period last year.
The rise in interest rates was a concomitant of the series of policy rate hikes by the RBI to control inflation and to rein in inflationary expectations in the economy. Union Finance Minister Pranab Mukherjee on Friday said interest-sensitive sectors like automobiles and real estate are likely to get affected more compared to other segments by rise in borrowing cost.
Mr. Mukherjee said since July 2010 the banks have raised their base rates (the minimum lending rate) in the range of 75-325 basis points.He also said the government has been giving interest subvention to certain sectors of the economy to cordon off the impact of continuous rate hike. In another question he said the funds collected under New Pension System (NPS) from the government sector employees and from private investors is Rs. 9,465 crore.
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