Wary India Inc has an eye on growth

While there could be a concern on the impact of continuing monetary tightening on investment and growth, the RBI has made it clear that at the present juncture controlling inflation is its priority, CII said in a release. ?CII fully appreciates the dilemma that the government and RBI are faced with vis-?-vis the need to contain high inflation and the need to drive growth, especially given the fact that a large part of the current inflationary pressures are due to global commodity prices whose impact it is difficult for the policy makers to control. CII welcomes the RBI?s target of WPI inflation being around 7% by March 2009,? the release added.

The release further said that concerns about sustaining growth in the environment of monetary tightening remain. Recent industrial growth numbers point to a moderation in the growth momentum. ?However, CII surveys have shown that industry?s sentiment towards investment is still strong. Many sectors are operating at close to full capacity and are therefore planning capacity expansions. Such capacity expansions would fuel investment demand and keep the growth momentum strong. Increase in interest rates could impact the investment momentum and corporate cash flows. The future trends in corporate profitability and execution of the investment pipeline would need to be monitored in this context,? CII said.

Sajjan Jindal, president, Assocham said, ?The tightening of the money supply may lead to a fall in the overall business confidence with companies postponing their investment plans in the time to come”. With decline in the forex reserves recently, which has reduced the overall money supply in the system, a further hike in the interest rates could decelerate the situation further, added Jindal.

Assocham said the current inflation is due to the supply crunch hitting globally, the hike in the policy rates may not be able to scale down the impact of rising prices. It becomes necessary to address the supply side inefficiencies so as to bring down the rising prices to the central bank?s comfort zone.

The Mumbai-based Indian Merchants? Chamber said it apprehends that GDP growth rate, being projected at around 8% for the current fiscal as compared to 9% in 2007-08, may not materialise with the RBI?s emphasis to contain inflation at any cost by hiking interest rates.

For bringing down inflation rate to around 7% by the end of the current fiscal and ? to 5% soon thereafter”, the RBI has sought to ruthlessly curb expansion of liquidity by hiking repo rate by 50 basis points (BPS) and CRR by 25 BPS — both to the level of 9 % each, the highest in the past eight years. In all, the Reserve Bank has increased the CRR by 150 basis points this year, while the repo has gone up 125 basis points, including the latest announcements, according to a press statement issued by IMC President M N Chaini.

The Chamber president apprehended that this harsh measure is expected to raise the PLR by at least 0.50 per cent, thereby making the interest rate on bank credit beyond the reach of all productive sectors like industries and services, it said.

Chaini said that the RBI has directed banks to review their business strategies aimed at ensuring that long-term financing by them would not only be viable, but also reasonably profitable to them. For strictly enforcing this directive, the RBI has decided to put all the major banks under its scanner, he said. However, any tampering with the interest rates at the current juncture is bound to derail India Inc plans for industrial expansion, he added.

The RBI?s decision may have a detrimental impact on investment. To make the monetary measures to be effective, it is essential that fiscal consolidation should be given a push, which has received a low priority in recent times, the IMC said.