India Inc has expressed disappointment over the Reserve Bank of India's decision to keep interest rates unchanged.
This, according to various industry associations, would result in huge capital inflows leading to further appreciation of the rupee.
"It seems that inflation has become RBI's sole concern. We fear that the continued policy indifference towards real issues of the economy may compel the industry to postpone investment plans," Venugopal N Dhoot, president, the Associated Chamber of Commerce and Industry, said.
In its third quarter review of the monetary policy for 2007-08 on Tuesday, RBI kept the bank rate, reverse repo rate, repo rate and cash reserve ratio unchanged.
In the wake of the US Federal Reserve cutting interest rates by 75 basis points, India Inc was expecting a cut in the bank rate and repo rate to soften the high interest rate structure in the country.
"The significant interest rate differential would manifest itself in a surge in capital inflows resulting in the rupee appreciating further, curbing the competitiveness of exports," Ganesh Kumar Gupta, president, Federation of Indian Export Organisations, said.
"A bank rate cut would have reinforced the growth momentum in the industrial sector. Also, it would have contributed to stablisation of investment flows and, in turn, contained the inflationary tendencies due to the recent cuts in US Federal reserve rate by 75 basis points," L K Malhotra, president, PHD Chamber of Commerce and Industry, said.
The index of industrial production moderated to 9.2 per cent growth during April-November 2007, from 10.9 per cent during April-November 2006.
The manufacturing sector also recorded a fall in growth at 9.8 per cent during April-November 2007, as compared with 11.8 per cent during the same period in 2006.
Production of consumer durables also declined during April-November 2007 to 4.1 per cent from 10.1 per cent. The consumer non-durables sector plunged to 2.1 per cent as against 14.8 per cent in 2006, as well.
However, the Confederation of Indian Industry termed the move by RBI as "neutral" and a deviation from the hawkish stance taken earlier.
"There is an underlying focus on stability, which is conservative. CII feels that in uncertain times, this is strategically a good stance, as long as the apex bank explicitly makes it known that it can take action pertaining to key rates if the situation demands," a CII release said.
According to Assocham, the decision to restrain from cutting interest rates would make it difficult for various industry segments to cope with slackening demand, rising imports and high borrowing costs.
Moreover, the small and medium scale sector, in the absence of funding and competition from cheaper imports, is bearing the brunt of the slowdown in demand and expensive domestic funds.
"We were hoping finance rates would come down. Now rates will remain unchanged. This will not help us," said Pawan Goenka, President (Automotive Sector), Mahindra & Mahindra.
"It is quite disappointing. Already there is a slowdown in manufacturing. There was a big expectation of interest rate cut in line with decline in rates globally. The decision to keep rates unchanged is certainly disappointing, "said Sajjan Jindal, Vice-Chairman and Managing Directot, JSW Steel.
"If RBI had reduced interest rates, it would have given the real estate industry a psychological impetus. But at the same time, in the last quarter, we have seen, despite cash reserve ratio being increased, housing loan rates have come down. So keeping the rates unchanged will have no impact on the real estate industry. I feel interest rate has to come down only, it cannot go up," said J C Sharma, Managing Director, Sobha Developers.
"This is along expected lines. Clearly, what is coming out of the policy is that there is a lot of uncertainty around. Essentially, what the RBI has said is that global factors will become increasingly relevant, and at this stage there is no clarity on global events. RBI has adopted a cautious approach in the face of inflation risks and uncertainty on the global growth front," Sonal Varma, Economist, Lehman Brothers.
"I think it is still a hawkish stance and RBI is clearly highlighting the heightened risk to inflation, while acknowledging there is a slowdown in the real sector. There are also indications of moderation in corporate profitability and business confidence index. Non-food credit is also lower. RBI will maintain a hawkish stance, as there is an upside pressure on inflation. RBI has said risks to inflation have become more potent and real. This is a clincher in terms of maintaining status quo in the policy," Indranil Pan, Chief Economist, Kotak Mahindra Bank.
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