The steeper than expected hike in short-term interest rates by the Indian central bank has irked the industry, which had been calling for the Reserve Bank of India to desist from hiking rates.
Against an expectation of 0.25 percentage points, the RBI chose to err on the side of caution by hiking short term base interest rates by half a percentage point — making short term loans, including those to corporates, that much more expensive.
RBI is in the unenviable position of finding a working balance between the interest of ordinary consumers battling price rise and corporates eager to expand using cheap cash. Hiking interest rates brings down the amount of cash in the economy, controlling the rise in prices, but also making it more difficult for companies to get loans for their projects.
“With 11 consecutive interest rate increases in the last 15 months, RBI has emerged as the most aggressive Central Bank which is tasked with containing inflation,” said the Confederation of Indian Industries (CII), India’s biggest industry association and lobby. “CII would urge the RBI to pause and indicate when this tight monetary stance would be eased,” it added.
It had been bringing out survey after survey pointing out that availability of funds is seen as the number one worry by industries in India. India’s RBI, however, is known for its cautious and conservative approach and was widely expected to raise the rates.
However, Chandrajit Banerjee, Director General, CII, blamed the RBI for not being fully aligned to the interests of industries.
“At a time, when all available date indicate a clear slowdown in Industrial and economic output, this is a matter of great concern since there could be a tipping point beyond which salvaging a downward spiral of growth could be an arduous task. In this situation, a more than expected increase in repo rate would also hurt sentiments,” he said.
The other big industry association, the Federation of Indian Chambers of Commerce and Industry (FICCI) too said the tightening of money supply may choke growth and called the hike a “major disappointment.”
“With the growth momentum already under pressure, this move will further hurt the future prospects. Even the projected growth rate of 8 per cent for the year 2011-12 now looks difficult to achieve” said Rajiv Kumar, Secretary General of FICCI.
“In the trade-off between growth and inflation, RBI has clearly decided to sacrifice growth. Thus it may have been more consistent on RBI’s part to lower the growth estimate to below 8 percent rather than sticking to it”, he added.
FICCI too blamed rising fuel prices and the Government’s relentless increase in the agricultural support prices — some of which have doubled in five years — and high prices of “non-food manufactured products” for the high price inflation.
It also supported the RBI’s stand that the Government must do more to help rein in inflation and the same cannot be achieved by the RBI alone.
Now that the rate hike is done, CII said, the RBI should at least try to address the supply crunch (in funding) by bringing forth non-monetary schemes to ensure that companies have enough funds to grow, he said.
“It is imperative now that non monetary measures are rapidly deployed to deal with supply side issues, which continue to contribute to inflationary pressures… On the supply side, agricultural infrastructure including supply chains need urgent attention, as also storage and refrigeration of fruits, vegetables and staples,” Banerjee of CII said.
CII urged “the urgent approval and implementation of key projects” such as road contracts, “which could keep the investment demand alive, even as high interest rates in general act as a hurdle in this direction.”
High domestic interest rates are driving industry to borrow in foreign currency, which could potentially be risky in the event of exchange rate fluctuations, it warned.
He pointed out that some of the blame for India’s inflation must be passed to the rising oil prices, in turn caused from inflation outside India leading to rising crude prices.
“In fact, CII would very much urge the government to look at the downside risk that oil prices pose to the economy since more than 70 percent of India’s oil requirements are met by imports and there is very little price elasticity of demand in this area,” he added.
CII’s demands, however, unlikely to draw much response from the RBI, which is seen as reacting to the relentless rise of prices, rather than pursuing a pre-planned rate-hike strategy.