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Interest rate hike: Will they, won't they? - Views on News from Equitymaster
 
 
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  • Jan 29, 2007

    Interest rate hike: Will they, won't they?

    The last time inflation (as measured by the Wholesale Price Index or WPI) inched above 6% was two years ago, on 17 January 2005 to be exact. With the mandarins at the Reserve Bank of India (RBI) meeting on January 31 2007 to discuss the monetary situation, there is an underlying anxiety regarding interest rate movements.

    The bogeyman of inflation was also given a nod by the finance ministry as it tinkered with duties a month shy of the next budget. Import duties were reduced by 2.5%-5% on capital goods, project imports, organic chemicals and refractories. On portland cement, that has seen prices rise by over 50% since December 2005, protection has been completely withdrawn. Together, their weighted contribution to inflation is about 20%. On January 24 2007, Mr. Chidambaram took care of yet another flashpoint pro-actively. Area sown under oilseeds has declined by 8% in 2007, with expectation of around 5% reduction in domestic production. By cutting duties on vegetable oil by 10%-15%, he hopes to check the climb in their prices too as they have a 3% weight in the WPI.

    The capital goods industry is clocking an average growth of 17%, showing the continuing appetite for investment across sectors. Steel, coal, cement, refractories, chemicals all input costs have soared in tandem. By allowing cheaper access to imports, the government is trying to balance healthy growth without straining domestic resources.

    Active fiscal management coupled with mopping up of liquidity by the two-tranche hike in the non-interest bearing Cash Reserve Ratio (CRR), would need at least a month to filter through the system. Almost all banks have raised the barriers to further growth in credit to the 'non-productive' sectors like housing and real estate; the idea being to keep the growth momentum going while curbing other asset bubbles. Yet another hike so soon after this series of monetary and fiscal measures can depress the investment climate, and so to that extent will be unthinkable.

     

     

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