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India Inc leaders, surprised by Reserve Bank of India (RBI) Governor Raghuram Rajan’s move to raise the repo rate on Friday, say the central bank missed an opportunity to boost growth when almost all economic indicators are showing a downward trend.
“We understand RBI needs to strike a balance between inflation, currency and growth, extremely difficult,” said Chandrajit Banerjee, director-general, Confederation of Indian Industry (CII). “CII is fully appreciative of RBI’s concern on inflation, but as we have been saying, this is a supply side-led issue and, therefore, at this point, growth should have found priority.”
Chief executives warn the coming festival season would be a washout, specially for realty, consumer durables and automobile. “This has been a reality check. At a personal level, the message I get is there is so much work to be done. And, the policy cannot be contrary to the ground reality of inflation and current account deficit. We cannot kid ourselves that all is well,” says R Shankar Raman, chief financial officer, Larsen & Toubro.
Harsh Mariwala, chairman and managing director of Marico, said, “I am disappointed with the repo rate rise. I was expecting the new governor to have a different approach. When an individual starts on a positive note, there are high expectations from him.”
Chief executives say a rate rise has been signalled, despite RBI admitting industrial activity continues to remain sluggish and consumption demand is starting to weaken. “In such an environment, a positive signal, by way of a cut in the repo rate, would have helped perk sentiment,” says Naina Lal Kidwai, president of the Federation of Indian Chambers of Commerce and Industry and country head of HSBC India.
Many chief executives have complained high interest rates are making projects costlier and unviable. Projects of $120 billion are stalled.
Kidwai says there has been an upward pressure on inflation, but this is largely due to the rise in prices of food articles. Dealing with such inflation calls for structural changes in the supply chain of food products, as well as improving productivity through higher agro-investments. “With the rupee on the mend, we could see the pressure from imported inflation coming down. Given this situation and the concern on inflation, RBI could have maintained the repo rate at the current level, even if the case for a downward revision was not acceptable according to its analysis,” Kidwai said.
Real estate would bear the brunt of the rate rise, as consumers would defer plans to buy houses during the Diwali season. Brotin Banerjee, managing director and chief executive, Tata Housing, says in the short term, banks might raise interest rates. He added this would impact consumer sentiment in the sector. Potential house buyers are reeling from income erosion, owing to inflation and rupee fall. The sector has also seen high borrowing costs for projects with long gestation periods. “If not through the monetary policy, the industry needs to be provided immediate relief through other fiscal measures. The government should have policies to drive real estate growth, as this is the second-largest contributor to our GDP (gross domestic product),” Banerjee said.
But there is hope. P K Ghose, executive director and chief financial officer, Tata Chemicals, says the environment might improve in the long run, owing to a good monsoon and a bumper kharif crop. “For manufacturing to recover appreciably, the government has to address structural issues. Some steps have been taken in the recent past and, hopefully, we will see their impact soon.”
With no new orders and finance costs rising, the rate rise would be a double whammy for the infrastructure sector. Praveen Sood, group chief financial officer of HCC, said in increasing the repo rate to tame inflation, Rajan was following the policy of his predecessor. “It did not work earlier; it led to a slowdown in economic growth. I expected the new governor to think differently and take some measures to reduce interest cost and provide liquidity to restart the growth engine.”
Chief executives are, however, happy at the fact that the rupee has appreciated to manageable levels.
UNDERWHELMED
* CEOs say the rate rise is despite RBI admitting industrial activity continues to remain sluggish
* Many have complained high interest rates are making projects costlier and unviable
* Projects of $120 billion are stalled across the country
