Former RBI governor C Rangarajan defended the recent interest rate tightening by the central bank saying that some action was needed to control money supply.
MUMBAI: Companies will have to adjust to higher interest rates for sometime now. This is the message from the chairman of the economic advisory council to the prime-minister, C Rangarajan. “They will have to rework calculations taking into account the price (because) rate of interest will be tight,” he said.
The former Reserve Bank of India governor defended the recent interest rate tightening by the central bank saying that some action was needed to control money supply. “The action is correct. There is a need to control inflation — it has to be balanced with growth,” he said, adding that he was still optimistic about growth.
Rangarajan said the present interest rate situation was similar to 1995-96 (when Rangarajan was RBI governor) when companies had to grapple with high rates. Companies which borrow due to a high capital expenditure will suffer but they will have to prepare for a firm rate regime. He however, did not give a time frame till when he expects rates to remain high.
“Larger borrowers have access to foreign markets where rates are lower because we have given them the freedom to do that, but medium and low borrowers will be affected,” Rangarajan said.
The RBI has been raising rates since October 2004, to reign in the inflation. The CRR has been hiked by 150 basis points since December 2006 and the repo rate has been raised by 125 basis points through five sets of hikes since June, 2006.
Rangarajan also said that there are some signs of “overheating” in the economy. “However, at present the overheating is cyclical and we need to take care to prevent cyclical overheating from becoming structural overheating,” he said.
He cautioned against structural bottlenecks that could develop constraints on economic growth like the availability of power.
Rangarajan supported the need for creation of a corporate debt market because it will provide “institutional diversification”.
Replying to a question saying that there is no action from the government on making Mumbai a international financial capital Rangarajan said that “Bombay has the potential. But it is not easy to take decisions based on the recommendations. The committee talks about making the rupee fully convertible in 18 months which is not easy because reforms with statutory and legal changes need a lot of time to convince people,” he said.
He also touched upon the point of using the foreign exchange reserves for infrastructure projects. “Reserves should be used in enabling situations to build large projects in sectors like power to save the impact on imports,” he said.
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