High interest rates dry economy - INDIA

Up, up and away...that's the way interest rates have been going in the last four months. While the Reserve Bank of India (RBI) has been hardening rates since the second half of 2004, the pace has picked up sharply. Indicative of the broad trend in tightening is the trend in mortgage lending rates. While they had moved up only 50 basis points from the bottom of 7.5% during the 17-month period between September 2004 and January 2006 and 150bp in the 10-month period between February 2006 and November 2006, it has moved up sharply by 250bp in the four-month period between December 2006 and March 2007. A similar trend is reflected in consumer loan rates and borrowing costs for small and medium-sized companies. In fact, prime lending rates (PLRs) now hover around the 13% mark. So is price stability coming at the cost of growth? The RBI's tough monetary measures to rein in inflation have sparked off a debate among policymakers, the corporate sector and market constituents. The corporate sector is the most vocal. Indeed, in a recent business barometer survey by Delhi-based Associated Chambers of Commerce and Industry of India (Assocham), 86% of the 250 CEOs, CFOs and managing directors believed that the RBI has started over-reacting to the inflationary expectations without realising that increasing the cost of money beyond a certain point would slow down economic growth. READ FULL