Reacting to the increase in the repo rate and cash reserve ratio, CII stated that these are expected policy responses to inflation, though it may have been possible to await the lagged effects of the last round of monetary actions in June 2008 before taking these further steps. While there could be a concern on the impact of continuing monetary tightening on investment and growth, the RBI has made it clear that at the present juncture controlling inflation is its priority, CII said in a release issued today. CII fully appreciates the dilemma that the government and RBI are faced with vis-à-vis the need to contain high inflation and the need to drive growth, especially given the fact that a large part of the current inflationary pressures are due to global commodity prices whose impact it is difficult for the policy makers to control. CII welcomes the RBI’s target of WPI inflation being around 7% by March 2009.
Concerns about sustaining growth in the environment of monetary tightening remain. Recent industrial growth numbers point to a moderation in the growth momentum. However, CII surveys have shown that industry’s sentiment towards investment is still strong. Many sectors are operating at close to full capacity and are therefore planning capacity expansions. Such capacity expansions would fuel investment demand and keep the growth momentum strong. Increase in interest rates could impact the investment momentum and corporate cash flows. The future trends in corporate profitability and execution of the investment pipeline would need to be monitored in this context.
