'RBI wants to pull down rising prices'

Personally, I am not surprised at RBI hiking the repo rate at this point of time. In fact, I would have been surprised had they not done it.

The underlying logic for such a contrarian view is simple. We all know that inflation affects wider number of people than the interest rate increase does. So the concentration of appropriate authority will naturally be on how to mitigate the negative impact on an wider spectrum of people.

It appears that the RBI considered inflation as a bigger worry than growth which is fully justified even from corporate perspective. Sustained inflation creates instability in market since it depreciates Rupee on REER basis, CAD gets negatively impacted driving Inflation higher with India being a oil import driven economy. Inflation also reduces the purchasing power of people significantly and reduces the propensity to save and invest as the real worth of disposable income in the hands of people become much less than it is perceived.

Obviously, the above negativity affects business and growth more blatantly compared to calibrated increase in interest rate over a period of time. While interest rate increase also affects profitability and  business growth, there is lesser impact for the same. Some of the underlying reasons can be explained as below

a) increase in interest rate , no doubt, reduces profitability of business. But impact of even 100/200 BP overall increase in interest rate can not negate basic sustainability and profitability of any organisation, unless the business is seriously over-leveraged that it can not bear even a marginal increase in interest rate.

b) even a 50/100 BP increase in interest rate , when converted to percentage of revenue , usually will be a very minor percentage and hence, should not affect business so heavily, unless the capital gearing is not in equilibrium.

c) in any case, the range of interest rate in India is between 10-13% depending on credit rating of borrower, and accordingly, business gets the rate which is arrived at after considering all aspects of credit quality and for appropriate businesses, such increase should affect only marginally.

d) such baby steps in interest rate calibration goes a long way since once the inflation is controlled, growth follows automatically -- because  by taking such steps , RBI is preventing stagflation to creep in and damage the economy in long run.

My view is that, RBI is right in not putting the cart before the horse, and once Inflation is controlled, they can then tackle the growth issue subsequently on a much wider base -- and such growth will come on a sustainable basis.

Market buzz that interest rate increase will make resource mobilisation in India more costly and difficult also has to be seen in different perspective. Indian money has always been expensive and marginal increase will not deter Indian corporates to access that money if they needed it as overall impact as percentage of revenue -- such increase is marginal. And in any case, most of Indian corporates today are looking at international Loan Market and Bond Market for their growth capital.

(The author is president - international finance of Essar group)