Rate increases to curb inflation will dampen consumer demand: Tata

In a clear sign of the distress felt by India Inc over the frequent  rate hikes, Ratan Tata, chief of the $70-billion Tata group has warned that high inflation in India and China would dampen consumer demand for a range of industries including automobiles in a high-growth market.

In a letter to Tata Motors' shareholders at the company's annual report for 2010-11, Tata said, ''While 2010-11 has been a year of high economic growth in Asia, the quarterly growth figures in China and India have been declining. Inflation rates have risen and the central banks in both countries have initiated measures to slow down their economies to curb inflation. The resulting high interest rates, tighter credit regimes and higher fuel costs will dampen consumer demand.''

''What should be of concern to all is the creation of a situation where the pendulum swings too far in the opposite direction, causing another global slowdown - this time, not based on over-valued assets but on self-imposed fiscal prudence,'' he said.

He said in both India and China the central banks had initiated measures to slow down their economies to rein in inflation. ''The resulting high interest rates, tighter credit regimes and higher fuel costs will dampen consumer demand for a range of consumer products, including automobiles," Tata said in the report.

The Reserve Bank of India hiked policy rates seven times during the last financial year and once again in May, resulting in repo rate hardening by 225 basis points (bps) to 7.25 per cent and reverse repo rate 275 bps 6.75 per cent.

''The extent of an economic slowdown in Asia will depend on the severity of the anti-inflationary measures adopted. Automobile sales have already started to decline in India. There has also been a decline in automobile sales in China for the first time in two years", added Tata.