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Further rate hike may squeeze India Inc

India Inc, caught between sluggish demand and surging input costs, could slide into a crippling profit squeeze if interest rates rise further, business leaders warned on Tuesday.

business Updated: Aug 27, 2008 01:17 IST
HT Correspondent

India Inc, caught between sluggish demand and surging input costs, could slide into a crippling profit squeeze if interest rates rise further, business leaders warned on Tuesday.

About 40 top executives from member companies of the Confederation of Indian Industry (CII) huddled with Finance Minister P Chidambaram to find ways to tide over the slowdown and sustain high growth amidst a spike in inflation and slump in demand worldwide.

“Looking at broader conditions today, industry is assessing very hard whether to make that incremental investment or not,” said KV Kamath, CEO and managing director of ICICI Bank, who recently took charge as president of CII. “The pipeline (investment) is happening, but for incremental investment there is a lot of thought going into it,” he said, pointing to projects worth $700 billion that are already in the pipeline.

Kamath’s comments on Tuesday contrast with the optimism he displayed while taking charge of CII in April, when he said the industry was yet to witness any slowdown in investments despite the rise in interest rates and that corporate profits remained robust.

Much has changed since. Inflation, which was hovering around 8 per cent then, is now inching closer to a worrisome 13 per cent, despite a series of fiscal and monetary measures.

The Reserve Bank of India has twice increased the rate at which it lends to commercial banks in the short term and ordered them to hold more in reserves, so that there is less money in circulation.

Rating agency Moody’s Investor Services on Tuesday said the central bank could further tighten its monetary policy as inflation showed little sign of easing anytime soon.

Meanwhile, persisting concerns over a widening current account deficit saw the rupee hit a 17-year low in intraday trading on Tuesday.

The finance ministry made no comments on the meeting, but Kamath quoted Chidambaram as saying that he was hopeful of new investments coming to fruition.

During the meeting, the finance minister cited data from the Centre for Monitoring Indian Economy showing a monthly accretion of about $40 billion to new projects, Kamath said.

If sustained, that would mean an annualised additional investment of $450-480 billion. “This should augur well if all these projects come to the front burner,” Kamath said.