High interest rates can affect investment cycle.

The Federation of Indian Chambers of Commerce and Industry has expressed “concern” that higher interest rates in the next few months could thwart “the growth momentum that has been in evidence recently.”

Addressing the media after a meeting of the National Executive Council here on Friday, FICCI President Rajan Bharti Mittal said, “Although there is evidence that the capital goods industry has shown signs of a recovery, and that companies are preparing to invest in projects, there are concerns that high interest rates could affect the investment cycle.”

Mr. Mittal admitted that the “situation in the European Union can materially affect India.”

“Already, there are signs that demand from this region is getting a little wobbly,” he said. “Exports are under some stress,” he said.

Mr. Mittal said industrial recovery was also hampered by the rising cost of raw materials.

While diesel prices have increased by 10 per cent between January 2009 and April 2010, prices of coking coal have increased by 11.2 per cent, mineral oil by 15.1 per cent, furnace oil by 78.3 per cent, and naphtha by 85.7 per cent, he said.

Amit Mitra, Secretary General, FICCI, said small enterprises were particularly vulnerable to higher input costs and higher interest rates.

“Since small producers contribute significantly to exports, the price increase can adversely affect Indian exports,” he said. Admitting that credit offtake has “not really picked up,” he urged the Reserve Bank of India to “carefully calibrate” monetary policy instruments.

Source : The Hindu