“It is easier a pull a string, but difficult to push it” [September 16, 2011]

Hemant Kanoria, CMD, Srei Infrastructure Finance comments on increase repo rate“With inflation persistently remaining way above the comfort level, the RBI’s decision to increase repo and reverse rates by 25 basis points each (from 8% to 8.25% and 7% to 7.25% respectively) has been on expected lines and we sincerely hope this is the end of the rate hike cycle.
We have to realise that monetary policy has its limitations in terms of containing inflation when many of the factors fuelling this inflation are supply-side constraints. There is an urgent need for fiscal measures to address these issues by scaling up capacity in infrastructure sectors. But if rates keep on increasing, it will adversely impact investments in infrastructure. The recently released Index for Industrial Growth (IIP) figures clearly indicate that investment decisions are being put on hold. The negative growth figures for capital goods and intermediate goods clearly reflect a sentiment where investors would opt for a ‘wait and watch’ policy in a rising interest rate regime. We welcome the steps announced by Government in liberalizing the external commercial borrowings window for infrastructure investment. When domestic rates are so high, it becomes imperative to tap overseas funds which are available at lower rates, because deferring investments in infrastructure will only be detrimental to the economy.
After today’s hike, RBI may pause for sometime before reversing the cycle. The impact of the rate hikes are usually felt with a time lag. Thus the cumulative impact of the rate hikes will be felt for quite some time to come. It is easier a pull a string, but difficult to push it. Even when RBI reverses the cycle, the appetite for fresh investments will take some time to return. Till then we will have to settle for a moderation in GDP growth.”

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