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Thursday, April 7, 2011

Rate hikes hitting business: India Inc to RBI

Mumbai: India Inc has conveyed its concerns about “the significant impact of increasing inflation and interest rate hikes on its operations” to the Reserve Bank. The RBI has hiked its key rates eight times in the last 13 months in a bid to tame the high headline inflation number.

Quoting a recent study, Naina Lal Kidwai, Ficci vice president and HSBC’s country head, said a majority of the surveyed firms feel that inflation and successive hikes introduced by the RBI in the key monetary variables have started having a bearing on the industry’s performance. “Ficci’s latest quarterly manufacturing survey shows a significant fall in the overall sentiment and expectations of the manufacturing sector in Q-4 of FY’11, as compared to the previous two quarters. Only 60 per cent of total respondents reported that they expect higher growth in their sector as compared with the prior year. This is a significant fall with regard to previous two quarters in which around 68 per cent (Q3) and 71 per cent (Q2) respondents felt that they were expecting higher growth in their sectors,” Kidwai said during a meeting of India Inc representatives with RBI officials on Wednesday.

She said the most important factor for moderation in growth is the rise in the cost of capital due to monetary tightening measures introduced by the RBI. While liquidity conditions in March tightened again on account of tax outflows, the impact was cushioned to an extent by stepped up levels of spending by the government in the last two weeks of the financial year. Despite this, borrowing and lending rates remained elevated on account of year-end pressures.

“The worry, however, remains that with inflation remaining stubbornly high and with borrowing calendar of the sovereign kicking off from the first week of April, and liquidity conditions expected to remain in the deficit mode, further rate hikes by the RBI could impact investment plans and activity levels adversely going forward,” she said.

Assocham president Dilip Modi also asked the RBI to “review the need to resort to tight monetary policies during the current fiscal”.

Demand for credit from private sector needs to be met, this is further enforced by the volatile IIP performance in the recent months, he said. “Since government has targeted a lower fiscal deficit of 4.6 per cent, it is expected that government borrowings would be lower this fiscal and therefore would not be as formidable a challenge as last year. Hence there is an opportunity to leverage this situation to increase the credit flow to the private sector, central bank should take note of this,” Modi said.

Source: Financial Express


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