Growth story may lose sheen, warn experts

CONTROLLING INFLATION

The Reserve Bank of India's decision to raise the cash-reserve ratio by 50 basis points and repo rate by 25 basis points late last week could control inflation in the days to come but will dampen growth expectations, leading economists told Business Standard.

"Economic growth will surely be impacted. Real interest rates will go up. This will impact future investment decisions," Tata Group Chief Economist Siddhartha Roy said, adding, "In 1996-97, industrial production fell to around 6.1 per cent from 13 per cent in 1995-96 after the prime lending rate touched around 15 per cent. I hope we are not headed the same way. We will need to be careful about this trend." 
 

ANNUAL INFLATION RATE IN JANUARY 2007
Consumer price index for agricultural workers	9.50%
Consumer price index for industrial workers	6.70%
Consumer Price Index for Urban Non-Manual Employees	7.40%
Wholesale price index (for week ended March 17)	6.46%

It is worth noting that a day after the rate hike by the RBI, Finance Minister P Chidambaram had told Indian Institute of Management graduates that the country's economy was growing at a rate below its potential.

Led by an unprecedented boom in domestic consumption, the country achieved an average GDP growth of 8.6 per cent over the past three years. For 2006-07, growth is forecast at 9.2 per cent, the fastest in 18 years.

However, inflation too has risen sharply, with the annual wholesale price index based rate averaging 5.4 per cent in 2006-07. While this rate is within the RBI's target range of 5-5.5 per cent for the year, the rate has been hovering at the 6.5 per cent level since January this year.

The government as well as the RBI have taken a series of steps in the last few months to contain inflation which is seen worldwide as a tax on the poor.

Fitch Ratings Managing Director Amit Tandon said the impact of the rate hike would be felt more by small and medium companies that did not have access to cheaper money in overseas markets.

Big companies, which enjoy a high credit rating, would not be affected by the rising interest rates. "I hope we have reached the peak of monetary tightening," he added.

Crisil Prinicipal Economist DK Joshi said if the latest steps taken by the RBI to suck out some liquidity from the market failed to bring inflation below 6 per cent, the central bank could hike interest rates further.