Which way will Guv swing?

The fact is, rising interest costs have already started eating into bottomlines. Interest costs of 745 leading companies shot up by 16.29 to Rs 98,906 crore during the fiscal ended March 2006 as against a fall of 0.92 in fiscal 2004-05.

That8217;s why India Inc says further increase in interest rates will adversely affect the manufacturing sector8217;s performance, which in turn would upset the government8217;s efforts towards achieving double-digit growth.

Clear Signal From Bankers

However, bankers feel rates are expected to rise further as deposit growth is low and loan growth is high. 8216;8216;I will not rule out an overall hardening of interest rates in the rest of the nine months,8217;8217; ICICI Bank joint Managing Director Kalpana Morparia said. Others agree.

8216;8216;I expect the RBI to raise repo and reverse repo rates by 25 basis points during credit policy review on July 25. With the cost of funds increasing, the margins of banks are under pressure,8217;8217; said the chief of a nationalised bank. Of late, the RBI has been using repo rates to regulate the interest rate movement instead of the benchmark bank rate.

One school of thought has it that further rise won8217;t impact corporates. 8216;8216;I don8217;t think the RBI8217;s move to increase the interest rates would have a significant impact on the growth plans of companies. There may be a marginal impact as we have seen in the past8230; there has been a slowdown in credit offtake. But this move won8217;t be a hurdle in stopping the growth of Indian companies,8217;8217; said Shahina Mukadam, heard of research, IDBI Capital.

Task Before RBI

For the RBI, tackling the inflation level will be a big task. Crude oil prices have already hit the record high of 78 per barrel, fuelling speculation of another round of petrol/diesel price hike. Oil companies will bleed to death if the rise in global prices are not adjusted in India. The government is in a dilemma as it will be politically suicidal for allowing another hike.

Simultaneously, the rise in prices of foodgrains, raw materials, metals and other products and shortage of wheat and pulses are bound to put hurdles in the path of Reddy. In June this year, the RBI surprised everybody by raising the benchmark short-term reverse repo rate by 25 basis points to 5.75 per cent in a move primarily aimed at controlling inflation after local retail fuel prices rose. It was the second quarter-percentage-point increase this year, taking the policy rate to its highest since June 2002.

High fuel prices are again creating inflationary concerns. Reddy has a tough task ahead as the policy can8217;t afford to adversely affect the manufacturing sector8217;s performance, which in turn would upset the government8217;s efforts towards achieving double-digit growth.

Thanks to the good corporate performance, the demand for non-food credit has grown by more than 30 per cent in the last two years even as inflation remained under control at around 4.5 per cent. However, this year the growth in non-food credit demand would be slower at around 20 per cent.

Though US Federal Reserve has hinted at the possibility of ending its rate hike spree, global interest rates are hardening. Last week, Bank of Japan recently raised interest rates by 0.25 per cent from the zero level.

With Zeeshan Shaikh