Rate cut is essential to revive manufacturing: Seshagiri Rao
Rate rise shows RBI is leaning more towards controlling inflation at the cost of growth
 "Rate cut is essential to revive manufacturing: Seshagiri Rao")
The Reserve Bank of India (RBI) once again surprised the market with a rate hike when everybody was anticipating a status quo.
However, even after prolonged continuation of tightening monetary policy for a sufficiently long time, the objective of bringing down the inflation is not achieved. The tight monetary policy environment has contributed only to significant slowdown across all sectors in India.
A fine balance is to be maintained between growth and inflation. It appears from the latest rate increase that RBI is leaning more towards controlling inflation at the cost of growth even though the tight monetary policy so far followed has not resulted into taming inflation.
The need of the hour is to create conditions to augment the supply side, rather than curtailing the demand. There are surplus capacities in several core sectors in India, but not able to operate due to several constraints.
Instead of addressing this core issue, if the focus shifts to suppressing the demand with tight monetary policy, the (steel) industry will be further burdened with a peculiar situation of not being able to operate its plants while the prices remaining high due to non-availability of the products. A calibration of fiscal and monetary policy is essential to address the current peculiar problem, instead of resorting to rate hikes. Pumping in liquidity and reducing interest rates to stimulate demand in the interest rate-sensitive sectors and to kick-start the investment cycle to achieve accelerated growth rates should be the focal points of the monetary policy in the present context.
It is pertinent to note that high interest rate in India is a deterrent to attract investments in core sectors in spite of the latest potential demand in the country as the producers cannot pass on such burden to the consumer who cannot afford it. It is, therefore, essential to facilitate availability of goods and services at affordable prices, including interest rates on money. Many Indian infrastructure companies, which took up projects when interest rates were low, are now facing the problem of not being able to service the loans due to successive interest rate hikes and their inability to pass on the cost. The current rate hike is expected to further worsen the situation instead of reviving the ailing manufacturing and infrastructure sectors where further investments are to be done to meet the supply shortage.
However, even after prolonged continuation of tightening monetary policy for a sufficiently long time, the objective of bringing down the inflation is not achieved. The tight monetary policy environment has contributed only to significant slowdown across all sectors in India.
A fine balance is to be maintained between growth and inflation. It appears from the latest rate increase that RBI is leaning more towards controlling inflation at the cost of growth even though the tight monetary policy so far followed has not resulted into taming inflation.
The need of the hour is to create conditions to augment the supply side, rather than curtailing the demand. There are surplus capacities in several core sectors in India, but not able to operate due to several constraints.
Instead of addressing this core issue, if the focus shifts to suppressing the demand with tight monetary policy, the (steel) industry will be further burdened with a peculiar situation of not being able to operate its plants while the prices remaining high due to non-availability of the products. A calibration of fiscal and monetary policy is essential to address the current peculiar problem, instead of resorting to rate hikes. Pumping in liquidity and reducing interest rates to stimulate demand in the interest rate-sensitive sectors and to kick-start the investment cycle to achieve accelerated growth rates should be the focal points of the monetary policy in the present context.
It is pertinent to note that high interest rate in India is a deterrent to attract investments in core sectors in spite of the latest potential demand in the country as the producers cannot pass on such burden to the consumer who cannot afford it. It is, therefore, essential to facilitate availability of goods and services at affordable prices, including interest rates on money. Many Indian infrastructure companies, which took up projects when interest rates were low, are now facing the problem of not being able to service the loans due to successive interest rate hikes and their inability to pass on the cost. The current rate hike is expected to further worsen the situation instead of reviving the ailing manufacturing and infrastructure sectors where further investments are to be done to meet the supply shortage.
Seshagiri Rao, Jt MD & Group CFO, JSW Steel