A step in the right direction: India Inc

Barring one, almost all CEOs had predicted upto 0.5% hike in the interest rate hike on Tuesday

With the Reserve Bank of India (RBI) keeping interest rates unchanged at Wednesday’s monetary policy review, India Inc heaved a sigh of relief.

Chief executive officers (CEOs) said the RBI governor had taken a step in the right direction. “The governor has been contrarian in his approach and I see the move not to raise the repo rate as a step in that direction. Will this have any positive impact? At this stage, it is hard to say. But the pause in rate rises is certainly welcome,” said Harsh Mariwala, chairman, Marico.

Just a day before the policy announcement, almost all CEOs had predicted the high inflation would lead to RBI Governor Raghuram Rajan announcing a rise of up to 50 basis points in the policy rate. But with Rajan maintaining status quo on rates, they say clearly, the governor is focusing on growth, after two consecutive rises in rates dampened investments.

“I think it is only with apprehension that growth will be negative; the last IIP (Index of Industrial Production) shows that in clear terms. Besides, I think the rate increase does not yield low inflation, as we are yet to manage the supply-side equation. So, it has not proved to be very effective in inflation-control,” said Prabal Banerjee, president (international finance), Essar Group.

Rajeev Talwar, executive director, DLF, said the RBI move was the first sign of recovery. “If the government releases enough food stock in markets, food inflation will come down, and we can expect a better response from the RBI governor. He has done extremely well to withstand any compulsion to hike rates,” he added.

Owing to the high cost of funds, many infrastructure projects are stalled, and very few companies are starting new ones. “While we understand RBI has to be primarily concerned with price stability and fiscal policy has to complement monetary policy in getting the economy back on track, a symbolic cut would have helped the corporate sector. Corporate investments and capital expenditure for the future may at least have been given a strong positive signal; interest-sensitive sectors could have added to growth,” said Yogesh Agarwal, managing director of Avantha Group’s Ballarpur Industries Ltd.

The Essar Group, Reliance Industries, Bharti, etc, are raising dollar debt from abroad to swap local loans. This is working well for companies that have substantial foreign-currency earnings. As India heads for general elections by mid-2014, CEOs say inflation will certainly decline, with as the government taking multiple steps. “With elections coming, inflation will certainly cool. The stock markets and the industry feel it is a bold and a positive step by Rajan to keep the rates unchanged,” said Venugopal Dhoot, chairman of the Videocon group.

Others say the government and RBI are worried about falling industrial growth and the slowdown in sales of new homes and cars. Praveen Sood, group chief financial officer, Hindustan Construction Company, said it was necessary for the RBI governor to start indicating to the market inflation wasn’t the only factor; the weak economy was also important.