India Inc gloomily set for Rajan rate rise

Persistent high inflation will put pressure on RBI Governor Raghuram Rajan to raise interest rates

Chief executives of Indian businesses are expecting Reserve Bank of India governor Raghuram Rajan to raise interest rates by up to 50 basis points (bps) in the monetary policy review on Wednesday, to tame rising prices.

With the wholesale price index rise at a 14-month high at 7.52 per cent, the CEOs say companies should brace for Rajan's third rate rise since he took charge. The consumer price index rise is at an alarming high of 11.24 per cent.

"There will be at least a 0.5 per cent rise in the rate tomorrow, which is not so good news for companies planning to invest more," says Venugopal Dhoot, chairman of the Videocon group.

The high cost of funds is turning out to be a big complaint of Indian companies. It is also eating into the profits of many companies which expanded aggressively in the 2007-08 boom. Many such as the Essar group, Reliance Industries and Bharti Airtel have since raised dollar debt from abroad to swap with local loans. This works for companies with substantial earnings in foreign currency.

"The thinking is the rate hike will be limited to 0.25 per cent, as India Inc is already complaining about high rates," says Prabal Banerjee, president, international finance, of the Essar group. Chief financial officers (CFOs) say the RBI governor had already indicated, on December 11 in Delhi, that the priority was to find a balance between control of inflation and economic prices. Many industrial corporations are already complaining about high interest rates because they cannot pass through their higher costs into higher prices for their products.

A top CEO felt the governor might not change rates at all, as the previous two increases had failed to tame inflation. On the other hand, high interest rates had resulted in slowing sales of automobiles and homes, with customers avoiding taking of loans at higher rates to buy consumer products. Though some banks did try to encourage sales of consumer products, the response wasn't good.

While growth is stabilising, the CFOs say it remains soft. With the call money rate now near the repo rate, analysts say they do not see a need for further steps to ease liquidity. If anything, RBI might need to drain some liquidity from the system, after heavy non-resident Indian deposit inflows led to a significant drop in the liquidity deficit.

Analysts say a further recovery in annual economic growth will prove difficult in the coming quarters as the positive effect of a good monsoon on agriculture and electricity production washes out and net exports normalise somewhat after the big jump in July and September.