subject: Hardening of interest rates on the cards [print this page] Author: David Parks Author: David Parks
A Sakthivel, president of the Federation of Indian Export Organisations (FIEO), expects key lending rates to rise in the coming days in wake of the widening fiscal deficit and rising food inflation rates. Surge in interest rates is anticipated to have an adverse impact on the credit flow into the SME sector in India.
With food inflation standing at 19.83% and fiscal deficit up by 73%, it is likely that banks will tighten their monetary policies and harden interest rates by a phased increase in policy rates and cash reserve ratio (CRR) over the next 6-8 months, said Mr Sakthivel in a statement issued for press release.
As per estimates provided by Mr Sakthivel, the account deficit for the second quarter that ended in September 2009 stood at a flat US$12.6 billion and the credit growth remained subdued at 11.5% for the same period, as compared to 24% in the previous year.
Hardening of interest rates will make credit availability costlier for small businesses in India. However, the government must ensure the continuation of stimulus packages if interest rates go up, said Anuj Chandak, senior analyst at Adi Capital Investments, a small-sized investment advisory firm in Mumbai.
The FIEO chief also stressed on the need for the High Power Transaction Cost Committee to consider partial reimbursement of transaction costs borne by the MSME export sector in view of the hardening interest rates and appreciating rupee.
