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Though the Indian corporates are upbeat on the improving global economic scenario, they are wary of inflation at home. A drought-like-situation in some states can actually push the key interest rates up from the comfort zone
Macro-economic variables like inflation, interest rates and currency exchange rates do influence corporate decision-making. So, this round of survey has a special section on India Inc''s expectation on these macro-economic variables. Inflation is expected to inch up but may not see similar increase in interest rates immediately.
Inflation
At present, the inflation based on CPI (Consumer Price Index) is still closer to double-digit zone. However, almost 39% of the respondents expect inflation rate to come below 8% by Sep ''09. It might be due to easing of fuel prices and other commodities. Nonetheless, nearly a third of respondents expect inflation to hover around 9-10% by September. Delayed monsoon and prediction of a drought-like-situation in some parts of the country might have prompted the respondents to anticipate increase in food prices.
Low rains mean lower agriculture output, which in turn is likely to fuel food prices. India Inc has anticipated an average inflation rate for consumers at 8.69% by September-end. There are no different views on WPI-led inflation. Though it is in the negative territory for quite some time now, the average inflation rate is expected to be around 5.63% by September-end according to the latest survey.
Interest rate
Though there are positive expectations on inflation front, companies don''t anticipate any increase in interest rate at this juncture. Almost 60% of all respondents now pay annual interest rate around 12% for long-term investment funds while another one-fourth are borrowing money at 16% despite reduction in lending rates in recent months. However an increasing number of respondents expect the interest cost to ease though the fall is anticipated to be moderate. Short term capital funds also cost at around 12% per annum to the borrowers. The number of respondents paying higher interest rates in the range of 12.1-16% per annum is relatively higher. So, they are more hopeful that working capital funds to have lesser cost in another six months.
Exchange rate
The rupee is currently trading at around Rs 47.5-48 per dollar. More than half of the respondents expect rupee to be in the range of Rs 47.1-49 per dollar by October-end. It might be on account of no anticipation of major changes in the economic scenario. However, a relatively large chunk of respondents (almost 23%) anticipate rupee to depreciate and to fall below Rs 49 per dollar by March-end.
Conclusion
India Inc is hoping for an improvement in investment climate in coming months. But whether the interest rates continue to soften remains to be seen. However, of late, the increase in prices of commodities?crude oil, metals and food grains?may push rate of inflation beyond Reserve Bank of India''s comfort level of 4-5%. In such a case, aggressive tightening of monetary policy resulting into higher interest rates could not be ruled out. This will throw a spanner in the best of plans of India Inc.
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