Enough is enough, India Inc tells Reserve Bank

Most expect a 25 bps rate hike today, but want pause.

If India Inc has its way, tomorrow should be the last of the interest rate rises by the Reserve Bank of India in this current cycle. Most are treating a 25 basis point increase in key policy rates in the mid-quarter review of the monetary policy as given, but say any further hike will just kill growth.

“Enough is enough”, said Videocon Chairman and Managing Director Venugopal Dhoot, adding a rate rise beyond this would slow down investments. Dhoot argued high interest rates in India as compared to other countries will lead to capital inflows into India. “That will mean appreciation of the rupee, which will hit exports. I think RBI will have to be mindful of that,” he said.

In a letter to RBI Governor D Subbarao, the Federation of Indian Chambers of Commerce and Industry (Ficci) said further rise would affect business sentiment adversely and further dampen the pace of investments. According to Ficci, the GDP growth figures in the fourth quarter of 2010-11 have confirmed the slowing in sectors such as manufacturing and mining. “The pace of investments is a key determining factor for overall growth, and once it loses momentum, it is difficult to bring it back,” Ficci said.

The country’s business leaders argued that inflation is being primarily driven by supply-side factors, for which monetary policy plays a limited role.

On the other hand, a secular rise in the interest rates over the last 15 months has adversely affected industrial output and growth.

Since March 2010, despite RBI raising interest rates on nine occasions, inflation stayed stubbornly high. Inflation, measured by the wholesale price index, was 9.05 per cent in May and what has worried analysts is the sharp increase in manufacturing prices which implies pick up in core inflation.

“If the cost of borrowing goes up, they pass it on to us and that will affect investments. The last rate hike itself was very steep and it is already having an effect, as there has been a slowdown in investments,” said V Ashok, Group CFO, Essar.

Representatives of the realty sector also want RBI to press the pause button. Says Pradeep Jain, Chairman, Parsvnath Developers, “Too many rate hikes will not augur well for the economy. It makes funds expensive, which hurts profitability of companies. Real estate sector supports 270 other industries. So, if this sector is affected other industries will also be impacted.”

In its financial stability report published on Monday, the central bank had said while inflation is likely to stay at elevated level more moderation in growth may take place. But, industry captains also argue that rising rates is not a permanent solution.

Anil Sureka, director (finance), Ispat Industries, said, “Raising interest rates is not the solution. RBI should look at some other solutions to control inflation as clearly, this isn’t working out,” he added.