India's Interest Rate Increase Won't Slow Growth

India's Interest Rate Increase Won't Slow Growth

April 30, 2005

Today India raised its equivalent of the Fed funds rate by one-quarter percent to 5%. It won’t slow the place much. Inflation has already slowed to 5% from 8-9% last year.

GDP will grow 7-8% this year, driven by huge increases in capital spending. And business borrowing is soaring. Borrowing by medium-sized and large Indian companies rose by Rs322bn ($7bn) between April 2004 and January this year, compared with only Rs17bn a year earlier.Non-food credit, which includes both retail and corporate borrowings, grew 26.5 per cent last year, against 18.4 per cent in the previous year its highest level in more than half a century, but for an aberrant year in the 1980s.

The credit boom comes alongside a burst in capital-raising on domestic markets, in which Indian companies are poised to raise record sums from initial public offerings. An estimated Rs400bn worth of IPOs is to be offered this year compared with Rs214bn in the 12 months to March.

Why are they investing? Because theie government understands that growth requires capital. They have done a number of things to reduce risk for foreign (U.S. and European) investors, including reducing foreign ownership limits on land and telecom companies. And they have invested heavily in telecom and technical education, both of which help their fast-growing professional service sector expand its business in the US.

Now if only our government would get the message and do the things to keep the capital here at home.


John Rutledge

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