India business warns central bank on rates

By James Lamont and James Fontanella-Khan in Mumbai

Published: June 15 2011 18:08 | Last updated: June 15 2011 18:08

India’s top industrialists have pleaded with the central bank not to raise benchmark lending rates on Thursday to combat the highest inflation of any leading emerging market.

In a strongly worded letter, the Federation of Indian Chambers of Commerce and Industry has appealed to the Reserve Bank of India to back off monetary policy tightening, warning that higher borrowing costs will choke off investment and damage an economy projected to grow at 9 per cent this year.

“Aggressive monetary tightening is having an adverse bearing on economic and industrial growth of the country,” Udayan Bose, chairman of the employer association’s corporate finance committee, wrote to Duvvuri Subbarao, the RBI governor.

With inflation running at an annual 9.1 per cent in May the RBI is expected to raise benchmark lending rates 25 basis points at its mid-quarter monetary review meeting on Thursday.

India has the highest inflation of any big emerging market and has struggled to bring it under control for two years. The central bank has responded by raising benchmark lending rates nine times since March last year, making it the most aggressive tighteners of monetary policy among Group of 20 nations.

Last month, the RBI raised the rate at which the central bank lends to commercial banks 50 basis points to 7.25 per cent.

But inflation has defied the central bank and government’s predictions of softening, instead finding impetus in rising food, energy and manufactured product prices.

In their letter, the industrialists said RBI efforts to control inflation, in particular driven by high food prices, with repeated interest rate rises were futile.

They warned that continued monetary tightening threatened social unrest precipitated by destabilised industrial growth, slackening economic growth and weaker job creation.

“Single-mindedly pursuing a policy of [an] interest rate hike could bring us closer to such a [hostile] situation,” Mr Bose wrote.

Analysts share those concerns, and warn that high prices have become structural rather than cyclical. They say borrowing costs of 13 per cent will deter business from investing to expand badly needed supply to meet surging demand among a population of 1.2bn people. They also criticise the RBI for reacting too late and timidly to rising prices.

Suman Bery, an economist, likened policy responses at a time of high inflation to a driver “pushing the brake pedal and accelerator at the same time”.

Sohil Chanda, managing director at Norwest Venture Partners, a fund which invests in infrastructure and power companies, said: “What really worries me is not high interest rates for a short period but that rates will stay high for an undefined period. There seems to be a total mismatch between fiscal and monetary policy . . . You also need to address other supply side problems to bring inflation under control.”

Some policymakers insist India has to pursue a return to low inflation. C. Rangarajan, chief economic adviser to Manmohan Singh, prime minister, said the current bout of high inflation had been triggered by rising food prices and that policymakers had to ensure it was reined in to 4-5 per cent.

“The RBI decision to hike rates month after month has been disastrous for our industry,” said Mohammed Aslam, chief operating officer of residential property at Jones Lang LaSalle in Mumbai. “Since the last time they increased rates [in May] by 50 basis points our sales and bookings went down 20 per cent…the rising cost of borrowing is hurting a lot.”

“A high level of inflation is not conducive to [high] economic growth,” he said. “I am firmly of the opinion that a high growth rate does not warrant high inflation. We should take every effort to bring down inflation.”

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