The unexpectedly steep monetary tightening last week has brought back memories of 1995 when the Reserve Bank of India was caught in a similar inflation vortex.

The steps taken then, like an increase in the cash reserve ratio to 15 per cent, to fight rising inflation had led to a rise in banks' lending rates.

The current prolonged monetary tightening, which started in September 2004, too has pushed up interest rates, but the real interest rates now are still lower than in 1995. The real interest rate is the current interest rate minus the current inflation rate.

For triple A-rated companies, the real interest rate in 1995 on shorter-term loans like working capital loans worked out to 5.9-6.9 per cent, against about 4.4-5.9 per cent now, whereas the real prime lending rate adjusted for inflation 12 years ago was at a high of 8.4 per cent, compared to about 5.65-5.90 per cent now.

The interest rates for project funding charged by erstwhile financial institutions like the Industrial Credit and Investment Corporation of India were closer to 20 per cent, with real interest rates in the range of 8-12 per cent.

Companies on an expansion spree have not been borrowing much from the domestic banking sector to meet their capital expenditure for the last two-three years, depending on foreign currency borrowings from overseas markets, which are about 200-300 basis points cheaper than domestic loans.

Companies that Business Standard spoke to admitted that the current real interest rate was lower than in the mid-1990s but said it could still stifle economic growth.

"We have lived with a much higher rate of interest, but the current rates will dampen growth," said Escorts Group CFO Shailendra Tandon.

Explained DCM Shriram Consolidated vice-chairman & managing director Vikram Shriram, "The level of competition and protection has changed totally in the last ten years. The current rates might be lower than in the 1990s but do not fit in with the existing business scenario where we have to compete with people borrowing at much lower costs."