The Indian industry, burdened with high interest rates and a strong rupee, may have something to cheer about soon. As finance minister P Chidambaram hinted as measures to address problems faced by companies, particularly exporters, by a rising rupee, HDFC chairman Deepak Parekh?s comments that he saw a downward correction of 25 basis points in interest rates in the near future is sure to bring some relief to the manufacturing sector.
The rupee exchange rate is market-determined and the government has no view on its rise, Chidambaram said on Friday, while indicating that there would be relief for those facing problems amid the currency?s fluctuations. The rupee weakened 0.5% this week to 39.555 against the dollar, snapping three weeks of gains. It has risen almost 12% this year.
Chidambaram, however, pointed out that the domestic currency has appreciated by only 6% against a basket of six currencies while it has gained 12% against dollar. ?You must also see the real effective exchange rate,? he said speaking to reporters on the sidelines of a L&T function.
Parekh, who was also speaking at the same occasion, said interest rates were likely to see a downward correction of 25 bps in the near future with inflation under control and the economy growing at the rate of 8.5%.
?I think there may be some reduction in the interest rate in the country within a month or so as the country?s economy is doing well and gearing up to achieve the GDP growth rate of 10%?. While inflation has already come in RBI?s comfort zone, there is pressure on the interest rate to come down, he added. Manufacturing sector, that is the key to development, cannot be ignored or burdened with high-cost rates, he added.
Overseas investment has strengthened the rupee and stoked inflation, which reached a more than two-year high of 6.69% in January 2007. Prices rose 3.65% in the week ended December 8 from a year earlier, slower than the last week?s 3.75%, the government said on Thursday.
?I also personally believe that the interest rate may be brought down by 25 bps in near term and it may be reduced by 1.5 bps within next 18-20 months,? said Manisha Girotra, MD, UBS Securities India Pvt Ltd. It was due to the fact that country?s economy was doing quite well and reduction of interest rate will help the GDP grow further, she added.
However, some analysts have said the inflation data was not a true picture of the price pressures persisting in the Indian economy, which has not raised its state-set fuel prices since February despite substantial increases in global oil prices. India imports more than two-thirds of its oil needs.
?The RBI is likely to keep rates unchanged in the presence of some strong inflationary pressures,? Gaurav Kapur, senior economist at ABN AMRO Bank, said. Goldman Sachs had also said in a report that rupee appreciation would continue to put a downward pressure on inflation, which it forecast to stay around 4.4% in the new year.