Strong growth may see RBI hike rates

A strong performance in fiscal year 2009-10 has revived hopes about the Indian economy clocking 8.5 per cent growth in the current fiscal. However, this good news comes with a rider: Good growth could force RBI to shift its focus from promoting growth to controlling inflation and increase interest rates.

Beating forecasts, India’s GDP grew by 7.4 per cent in 2009-10 on the back of a strong performance by the manufacturing sector and positive agricultural growth.

“The main thrust for maintaining the growth momentum in the near term will be on the manufacturing sector. We would urge that the policy tools should be fine tuned keeping this in mind. Hiking of interest rates at this point in time will act as a break on the overall growth process,” said Mr Rajan Bharti Mittal, the president of the Federation of Indian Chambers of Commerce and Industry (Ficci).

Crisil chief economist, Mr D.K. Joshi, said RBI is expected to increase interest rates in the fiscal. “While increase in interest rates does impact the industrial growth, there will be other positive factors like increase in exports due to further recovery in the global economy,” said Mr Joshi.

He said that the GDP is expected to grow by eight per cent in the current fiscal. Though there is a heighten anxiety about the monsoon, which has arrived in the country on Monday, Mr Joshi thinks that the monsoon will not have much of an impact on the GDP figures.

“Nowadays the contribution of the agriculture sector to the overall GDP has declined and there has also been a decline in the ability of the agriculture to impact other sectors,”
Crisil chief economist explained.

The Union finance minister, Mr Pranab Mukherjee, on Monday also exuded confidence that the growth momentum would continue and the GDP will grow by more than 8.5 percent in the current fiscal.

“The growth numbers are pleasant but not really surprising, because we were expecting them to be robust which they have turned out to be,” the finance minister said.