The RBI has reiterated its short-term lending and borrowing rates by 25 basis points. What effects will this trigger in the Indian Textile Industry?

Inflation rates still keep hovering above the comfort zone. The present state of inflation is complex, encompassing both short and long-term issues. Attempting to break the back of the beast, the Reserve Bank of India (RBI) has increased its key rates for the fifth time in the same year. Though not very successful, RBI is trying its bag of tricks to curb the skyrocketing inflation rates.

But, a complete elucidation of inflation issues is out of the scope of the credit policy of RBI. The Central Bank is more worried about the soaring inflation rates than the resulting industrial squeeze likely to result due to the rate hikes. An increase in interest rates is likely to minimize industrial profits, which will consequently lower down manufacturing investments and growth. Hikes in the interest rates will also have its impact on consumer demand, especially for products purchased on credit.

However, overall, the interest hikes have evoked a mixed response among individuals. A recent FICCI Survey on the Indian Manufacturing sector states that around 44% of them believe the interest hikes will influence their borrowing, while 43% of the respondents state that the hikes will not be noteworthy. Economic analysts predict that RBI would move further to tighten its monetary policies, and chances are there that the rapid tightening of the monetary policy will take a toll on both consumption and investment demand, ultimately easing the growth impulses. Inflation rates are not expected to decline to the 5% mark as estimated by the Government. (Source: ficci.com)

Textile Industry Impact:


Industry experts contemplate that the hikes are likely to have only a moderate impact on the growth of the Indian industrial sector. In the Textile and Apparel sector, production for the period of April-June has increased when compared to the corresponding period of the previous year. Capacity utilization in the textile sector is good enough, running higher capacity then the previous year. The sector is optimistic, expecting the same boost in the months to come. Export growth in likely to be steady. The sector expects Government stimulus to achieve further growth in the sector.


Despite all the initiatives taken by the RBI inflation rates would hover high for the next few months driven by factors such as diminishing rupee value, food inflation due to monsoon, and a hike in fuel prices. It is expected to create a mild effect on the countrys industrial growth. There is a fear that, other countries; as a counter action, might begin monetary tightening. This is due to the sentiment that tightening may restrict growth in the region. Indian textile sector positively expects growth, as the RBI policy is currently focusing to curb inflation rather than encouraging economic growth.


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References:


1.      Businessworld.in

2.      FICCI Economic Outlook Survey, July 2010, Ficci.com