‘Industry can’t have unfair expectations on interest rate cycle’


The industry cannot have “unfair expectations” in terms of the interest rate cycle as central banks across the world are now tightening monetary policies, CII president and Tata Steel CEO & MD T V Narendran said. In an interview with Pranav Mukul and Aanchal Magazine, speaking about the impact of the pandemic on the MSME sector, he exhorted that ‘one-size-fits-all’ may not work on getting some sectors back on track. Edited excerpts:

Interest rate cycle is taking a turn and with inflation rising and pressure from inputs prices, how do you see it all impacting the investment scenario?

The sentiment is still quite positive when we talk to our members. The increase in interest rates were in some sense inevitable given the inflationary pressures and we feel the RBI has been very accommodative over the last few quarters. So we cannot have unfair expectations, central banks across the world are taking these calls. As far as input cost pressures are concerned, there is some concern about some margin pressures while the demand continues to be strong. But whether the margins will get impacted, how much of the impact of the input costs can be passed on to the customers without hurting demand — these are some of the questions our members are dealing with. But overall when we have spoken to them, the sentiment is positive, people expecting to continue to spend more on capex than they did in the previous years. So, there is obviously some concern about the turbulence but nothing has been derailed so far.

While a tightened monetary policy may have an impact on inflation, there seem to be more structural issues. Do you think that interest rate hike alone would be enough?

The inflationary impact is of multiple reasons. Lot of it is to do with the recovery post pandemic globally being faster than most people thought and supply chains not prepared for that. So you had shortages on semiconductors, containers, multiple bottlenecks, which were exposed which led to higher costs. Similarly, geopolitical events also had an impact if you look at China and Australia had a problem before that. Now with the Ukraine problem, for instance, the coking coal prices are very dependent on the geopolitical issues. So it was up or down depending on that. That’s big input cost for steel sector. Some of these are structural but not necessarily permanent. They are structural but will go away as things settle and the RBI has been taking a view and that’s why it has not been increasing interest rates because they felt that some of these have less to do with local issues and more to do with temporary global issues. But having said that, as inflation has gone up and India is also very vulnerable to oil prices, RBI is taking a view and like all central banks, they cannot sit by if inflation is higher than what they are comfortable with. So that’s an action that they will take.

There are many sectors that were impacted worse than the others. MSME sector is one, but even within MSMEs, it’s not everyone. If you really look at India’s strong exports, a lot of exports happens through MSMEs. Many MSMEs have also done well but there are many who have struggled. So you need to have a sector-specific approach rather than a MSME approach in general because not all of them are doing badly. Our own admission to the government has been that for some of these sectors, you have a very focused approach. Some things like ECLGS have helped, but even beyond that we need to see how we can help some of these sectors, which are more impacted and get them back on track. So it’s not a one-size fits all approach. Monetary policy is important, they need to do what they need to do, but not all of the inflation is because of the fact that on the supply-side, it has seen disruption and many people have gone out. Supply-side impact is more geopolitical and global than local, and MSME sector will certainly need some support.