Interest rates could go up after monetary policy review Tuesday

MUMBAI - India’ central bank, which will conduct a periodical monetary policy review Tuesday, is largely expected to hike key interest rates to curb rising inflation, but corporate India is worried that margins will be hit as borrowing costs go up.

The Reserve Bank of India (RBI) has already tinkered with interest rates six times this fiscal to control soaring inflation but had left them untouched during its last periodical review Dec 16.

The RBI has been the most aggressive major central bank in Asia this year, hiking key lending and borrowing rates by 150 and 200 basis points respectively.

However, this time, with food inflation again on the higher side, the RBI will look to lend a helping hand to the government in a bid to bring down prices.

Industry is all but thrilled with the idea. As input costs go up and banks set to lift lending rates post the RBI increasing key rates, businesses are worried about margins getting impacted.

“Hardening of raw material prices and the rising cost of capital are key factors that will impact the growth of manufacturing in the coming months,” said Amit Mitra, secretary general of the industry body Ficci.

Loans for automobiles, homes too could go up as banks will look to pass on the interest burden to consumers. Leading bankers have forecasted a hike in lending rates in the short-term, taking into account a hike in key rates by the RBI.

Industrial output fell to an 18-month low in November with production growing at a slow 2.7 percent. Although food inflation based on wholesale prices fell to 15.52 percent for the week ended Jan 8, high prices of vegetables continued to pinch people.

Therein lies the quandary the central bank and the government face.

A hike in interest rates may not have a dampening effect on inflation as most economists argue that the issues causing rise in food prices are related to an inefficient supply chain.

But raising interest rates will definitely make capital costlier for many businesses including those in manufacturing.

“It is unlikely that price rise is demand driven and accordingly changes in monetary policy variables (such as an increase in interest rates) will not help in controlling the rising prices. We believe that a large part of the inflation is more driven by supply constraints,” said Shanto Ghosh, principal economist of Deloitte in India.