Finance ministry officials say this will only lead to supply bottlenecks and, thus, fail to rein in inflation.
As all eyes are riveted on the Reserve Bank of India’s monetary stance amid calls from various quarters for a pause on tight money policy later this month, the government believes that hiking interest rate beyond a point will not cool down inflation.
Such a move will, instead, create supply bottlenecks that aggravate the price pressures in the current context, according to the finance ministry. Officials in the ministry say a hike in interest rates are hiked will make the cost of credit dearer, making it difficult for manufacturers to produce goods.
This, in turn, adds to supply bottlenecks and aggravates inflationary situation if it is caused by the supply side.
Deloitte, Haskins & Sells agrees. The accountancy firm’s India director, Anis Chakravarty, notes that RBI’s hiking the policy rates 13 times since March 2010 has not helped headline inflation numbers. The price rise has hovered at 9 per cent for the past 11 months in a row — till October this year (see chart). “RBI’s persistent rate hike has squeezed margins. SMEs (small and medium enterprises) are the ones to bear the brunt,” he adds. The (central) bank’s move has raised input costs and borrowing costs.”
Arun Singh, senior economist with Dun and Bradstreet, says inflation is basically the demand-supply mismatch, adding it can be tackled only through firm government policies to ease supply bottlenecks. “Inflation has been over 9 per cent for nearly a year now. This shows that RBI’s rate hikes have not helped arrest inflation in a bit way,” he adds.
Singh, though, concedes that RBI has done a right job. Logic: its monetary tightening moves have not cut inflation rate, but has “definitely reduced” inflationary expectations. “Had the RBI not gone for rate hikes, inflation would have gone up to 14-15 per cent,” he says.
The expert expects the central bank to go for one more rate hike — and, then, pause. For, inflation “will cool down” from early next year. “There may arise problems on investments and capital expansion plans affecting production, but that is only a long run scenario,” he adds.
Earlier, in a written reply in the Rajya Sabha, Finance Minister Pranab Mukherjee had said there was as no direct one-to-one correspondence between the quantum of increase in interest rates and reduction in the level of inflation.
The demand for the RBI to press a pause button at its monetary review slated for December 16 on its rate hiking spree comes in the wake of India’s economic growth declining to a nine-quarter low of 6.9 per cent in the July-September period of this fiscal. Moreover, September saw a decline in the industrial growth to a two-year low of 1.9 per cent. Besides, increasing cost of credit has pulled down investment.
The gross fixed capital formation (GFCF), a proxy for investment rate, showed serious downtrend in growth for the second quarter — at 7.06 per cent (year on year). It was 14 per cent in the first quarter. Also, GFCF saw a negative growth of 0.17 per cent during the second quarter sequentially.
A recent survey by the industry chamber shows that a majority of CEOs do not expect investments by their companies to increase over 10 per cent in 2012. In fact, some of them believe they will decline.
