Citing upside risks to inflation, the Reserve Bank of India (RBI) last week raised the policy repo rate by 25 basis points to 6.5 percent. This back-to-back interest rate hike for the first time in almost five years is also in the background of Rupee depreciation and high oil prices amid rising trade protectionism and geopolitical tensions. The rate hike has come on expected lines for the industry, but concerns also followed the decision over its possible impact on interest rates on loans.

The factors that led to the RBI decision are clear. First, as mentioned above, relative weakness of the Rupee -- this year, the currency has already lost over 8 percent of its value. Second, there is concern over the mounting inflation risk, especially core inflation. It is widely agreed that uncertainty over domestic inflation needs to be carefully monitored. Third, the sharp hike in MSP recently may fuel inflation in coming days. Other factors include loose fiscal policies, farm loan waiver decision by some states and high crude prices.

RBI considers inflation control as one of its major objective and the last week hike only reflects its caution. But the decision has raised concern among several industrial sectors. Most significantly, the realty sector fears that the hike will impact housing sales further. Similarly, auto sales are likely to be hit directly. At the same time, I think the impact will be no less harmful on our SME exporters. At a time of unfavourable condition in our major markets, tight liquidity conditions may further impact the sector.

Amid these concerns, some experts are of the view that export finance should be placed under priority sector lending. Last month, the Union Commerce Minister said that his ministry was talking to the Finance Ministry and the RBI in this regard. He even raised the question – “how do you say priority of India is export when it is not a priority for lending?”. The argument sounds good, particularly at a time when a tight monetary policy seems inevitable to rein in inflation.

I invite your opinions.