India Inc caught on the wrong foot

The spike in inflation to a three-and-a-half year high has caught Indian Inc on the wrong foot. Most of the companies feel that the high inflation rate will play the spoilsport and mar investment sentiment.

Although the government has put on a brave front by saying that the advent of monsoon and an appropriate mix of policy would keep the inflation under check, industry captains feel the cost of borrowing would go up due to the spike in inflation, which, in turn, would force companies to reduce their investments.

India Inc had planned Rs 50,000 crore worth of investments in greenfield projects and expansions. Industry experts also feel the rise in inflation would push consumers to the wall as the real rate of interest would go down further forcing them to spend less.

The tendency to curb expenditure would have a cascading effect on the consumer goods industry. However, a section of the industry that believes the increase in inflation is a combination of statistical carry-over, late arrival of monsoon and hardening of international oil prices, are keeping their fingers crossed. They say the rise in inflation is a short-term phenomenon and would come down once oil prices softened.

According to Tarun Jain, director finance, Sterlite Industries: "If the inflation rate remains around this level, a higher cost of borrowings for companies would affect investments adversely. Also at the current interest rates, the real interest rates become negative at this level of inflation."

D D Rathi, wholetime director, Grasim Industries, adds: "This level of inflation will have a negative impact on investment as it will drive up interest rates."

Also there have been no measures to contain this sort of a rise." Rathi feels the rising rate of inflation calla for realignment of the duty structure.

However, there are some who believe that the inflation rate has reached its peak. According to N S Paramshivam, group head, forex, Essar group, although oil prices have been going up, which may affect inflation further, all other indicators are well contained and therefore this rise could be a short-term one.

He adds that the government's target of retaining inflation under the 5 per cent mark should be revised, at least by 50 basis points, if the trend continues.

While the 10 year benchmark yields have already shown some increase, key rates like repo and bank rates are likely to remain unchanged. "There could be increases in personal loan rates, home loan and car loan rates, but the key rates like the repo and the bank rates will not be affected," Paramshivam adds.

The Reserve Bank of India bank kept official rates unchanged in May in order to sustain economic growth at about 7 percent, but shifted to a neutral policy stance after three years of a soft one. The bank rate, used to price loans, is at a three-decade low of 6 per cent, while the short-term repo rate is at 4.5 per cent.

Spoilsport

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• Companies feel that the high inflation rate will mar investment sentiment
• Experts feel the rise in inflation would force consumers to spend less
• Analysts say the rise is short-term and would come down once oil prices softened