India Finance Brief

Following consecutive rate hikes in the Financial Years (FY) 2010-11 and 2011-12, the Reserve Bank of India (RBI), is now facing pressure from both the government and the corporate sector to not initiate any further hikes.  It is widely being believed that monetary tightening is not helping to create the desired impact - that is, to curb the spiralling inflation; rather it has only helped to make borrowing expensive and decline the rate of growth. 

Understandably, this will not be an easy task for the RBI.  While the Central Bank has risen the key rates 11 times, and by a cumulative 325 basis points, it is still grappling with ways to tame inflation. The rate hike announced in late July hasn't in any way helped to create an impact on inflation. Inflation rates in July were 9.22% and estimated to have grown to 9.7% in August. Any impact at all, is being felt on industrial growth. Growth in Industrial production has declined from 6.6% in June to 3.3% in July.  Industry is not happy with the sharp toll that rates have taken on growth; they are unable to borrow, and banks are unsure of lending, as they fear the risk of bad loans As for the government, it is now aware that the forecasted GDP growth rate of 9% may not be achievable for FY 2011-12, and has presently dropped its expectations to 8%.

For the moment, industry and analysts expect that RBI is still focused on curbing inflation, and will likely announce a further hike in rates in the mid-quarter monetary policy, that it will release in the next few days.   But opinions are abound, that an alternate strategy needs to be brought in, especially since increased interest rates will only encourage capital flows from overseas markets with less interest rates, and further compound the inflation challenge.  Also, there is the added fear that considerable monetary tightening will snow ball into long-term ramifications for the economy - as growth slows, and lesser jobs get created.

Clearly, the RBI has to contend with an unenviable job at hand.  However, it will need to deliver the right measures, and help balance the interests of varied groups - cheaper access to funds and growth for the industry, economic stability for the government, and a respite from sky-rocketing prices for the common man. A tall order, yes, but something that the nation hopes, will not be an impossible one.

About the author: Lakshmipriya Somasundaram is a Contributing Editor for TradeBriefs. She can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it