Credit squeeze seen hampering industrial growth
Saasachi Mitra
NEW DELHI, January 18: A battery of measures to squeeze credit unleashed by the Reserve Bank of India to stem a slide in the rupee could sacrifice growth at the altar of short-term stability, analysts said on Sunday.Industry officials hoped the Reserve Bank of India would ease its grip after stability returns to the foreign exchange market, but cautioned that financial crisis in the South East Asian markets would continue to influence Indian policies. RBI governor Bimal Jalan on Friday announced a two percentage point rise in the benchmark bank rate, the interest charged by the central bank on other banks, and buttressed it with other credit control measures to beat back rupee speculators. "Bimal Jalan has pressed the panic button," said SP Gupta, director of Indian Council for Research on International Economic Relations (ICRIER).Indian officials say the Asian crisis should not hurt India since its external account and foreign exchange reserves are comfortable, but finance minister Chidambaram
conceded on Friday that the rupee had caught the Asian flu. The rupee has lost about 12 per cent against the US dollar since mid-August, and sunk to a record low of 40.40 to the dollar on Friday before the central bank's surgical offensive pulled it back to 39.90/40 later in the day.The RBI raised the bank rate to 11.0 per cent and jacked up the banks' cash reserve ratio (CRR) to 10.5 per cent from 10.0 per cent to sponge off some cash from the banking system. "It is an overreaction by the RBI...It will rein in inflation at the expense of growth," said V Raghuraman, secretary-general of the Associated Chambers of Commerce and Industry (Assocham). Analysts said they could not predict the impact of the measures on the rupee and preferred to wait and watch its outcome on the foreign exchange market.Gupta said the government's sole objective seemed soothing the frayed nerves of foreign institutional investors (FIIs), who appeared to be reducing their investment in India in recent weeks. Net FII investmentdropped by $155.4 million during December, the second straight month of net outflows. "I doubt raising of interest rates will help. To attract funds, the government must further de-regulate the capital market," Gupta said.Business leaders said the RBI measures will raise the cost of funds for domestic industry. Bankers predict that lending rates would rise and the hike in CRR would drain the banking system of Rs 20-25 billion ($500-$630 million)"Cost of money will be dearer and hit industrial growth,"Raghuraman said, adding the steps would also hit exports. According to government estimates industrial output grew by just five percent in April-October 1997 compared with 10 percent in the same period a year ago. Some industry leaders felt that the measures could be temporary and were required to calm the volatile foreign exchange market. "There was a choice between reducing liquidity and trying to bring in stability," said Rashid Jilani, chairman of the state-run Punjab National Bank. The measures,
which were a reversal of the government's earlier liberal credit policy, were seen by many analysts as a short-term step which they hoped would be reversed after the rupee stabilised. But analysts and industry leaders were unanimous that India cannot wish away the impact of the Asian economic crisis. "A lot also depends on what happens in Southeast Asia," Jilani said.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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