RBI may hike interest rates to curb inflation

4 April, 2008:

Corporate India is worried about increasing interest rates in the country. There are reports that the Reserve Bank of India would explore options to increase bank rates in a bid to contain inflation in the country.

There are signs of hardening of rates with inflation standing at a 13 month high as on March 15, 2008. The central bank is expected to announce the annual monetary policy on April 29, 2008. The prices of commodities such as crude oil, edible oil, food items and metals, the geo-political situation and the general outlook of the domestic and international economies will have a bearing on the RBI policy decision, it is felt.

It is expected that there would be a small hike in the repo and reverse repo rates in the RBI policy. This would be instrumental in impacting market interest rates. The hike in interest rates has been explained in terms of the need to contain inflation.

The Indian industrial sector believes that growth could well decelerate on account of the interest rate hike. They say that the loan rates would rise and slow down bank credit. Consumer spending would also decline. As a result, the profitability of firms which depend not merely on price increases but also on the volume of sales would fall and lead to deferment of investment projects. The Indian government, which has been vouching for a softer interest rate regime in the country has also changed tack taking into account the rise in commodity prices.

Many say that political reasons have compelled the government of India to have a re-look at its strategies for lowering interest rate. With the election season ahead, the Congress party is cautious about taking any steps which affect its electoral prospects. Finance Minister P Chidambaram has hinted of taking monetary steps to curb inflation menace.

Since 2007, India has been feeling the heat of higher interest rates. The high interest rate is adversely affecting major growth sectors such as banking, automobile and housing. The Indian industry has been asking for a rate cut to boost economic growth in the country. In January 2008, the industrial growth of the country had come down sharply due to global and domestic reasons. According to sources in India's banking sector, credit demand has been quite lean in the first quarter of 2008.