The second hike in the Reserve Bank of India's (RBI) key lending rate in as many months comes with the attendant risk that it would eventually climb up to the end borrower, hurting consumer spending and corporate investment.
The quarter percentage point hike in the repo rate, at
which the RBI lends money to commercial banks, at 7.75% is creeping up to its peak of 9%. Last month, in his maiden credit policy, RBI Governor Mr Raghuram Rajan had made abundantly clear his commitment to price control.
Therefore, Tuesday's hike in the repo rate has not come as a surprise.
There is, however, a bigger message in the credit policy: there is enough proof that all's still not well with the Indian economy. Factory output remains barely above the negative zone, a sign of a crippling industrial slowdown.
The main reasons for the payback in industrial output growth were the persistent contraction in capital goods and considerable weakness in the consumer goods segments.
In the absence of real-time investment data, which by definition can be collated only with a lag, capital and consumer goods output offers the closest approximation to incremental asset creation activity and people's shop-end spends.
A reduction in both of these can therefore imply two basic trends: companies are deferring investment plans and people are putting off purchases.
Firms' decisions to invest, pretty much like the prices of most commodities, are largely governed by the laws of demand and supply.
The RBI has warned that the Indian consumer is set to feel the pinch of high prices well into next year, obliquely hinting that more rate hikes could be coming. The prognosis on growth is also gloomy.
Policy-makers at New Delhi's North Block and Mumbai's Mint Street have to negotiate through a maze of thorny issues. With alarming signs of a widening stress on the government's fiscal position, it's critical to nudge companies to spin out jobs and income. The onus is squarely on the government to push ahead with urgent measures to aid a turnaround that India is desperately seeking.
© Copyright © 2013 HT Media Limited. All Rights Reserved.