Fifth rate increase may dampen short-term consumer spending

Fifth rate increase may dampen short-term consumer spending
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First Published: Thu, Feb 01 2007. 04 03 AM IST
Updated: Thu, Feb 01 2007. 04 03 AM IST
India’s fifth increase in a key lending rate in 12 months , is stoking concerns among business leaders that consumer spending may slow down at least in the coming months and companies may have to look hard to raise funds. The central bank raised its lending rates to commercial banks by a quarter point to 7.50 %, signalling cash is getting dearer.
That’s the highest rate in four years, prompted by rising inflation, or the ballooning cost of living in India. A higher repurchase rate , or overnight rates at which banks borrow money from the Reserve Bank of India, usually translates into more expensive borrowing, often passed on to consumers.
“That’s a concern as it alters the overall consumer spending,” said Kishore Biyani, managing director, Pantaloon Retail (India) Ltd, India’s largest listed retailer. “The consumer will think he is getting poorer and it will affect his purchases.”
A 9% economic growth, the highest in 17 years, has put more money into the hands of consumers. They have never borrowed so much to buy homes, and 12.2 million people have a credit card now, compared with 3.2 million five years ago. Industrial activity, a ­measure of industrial production, has risen 2.3% to 10.6% in the April to November period over a year ago, led by manufacturing.
More big-ticket items such as car purchases will likely get hit, as car loans get dearer. Of India’s 1.1 billion population, only seven in every 1,000 own a car. Still, India’s largest carmaker, Maruti Udyog Ltd, said it will have to work out easier financing for consumers. “There will be an initial impact on demand, but it’ll be absorbed over a course of time,” said Jagdish Khattar, managing director, Maruti Udyog Ltd.
Corporates themselves might start to look elsewhere to raise money. Unitech managing director Sanjay Chandra said the rising interest rates will make it more attractive to borrow money from overseas.
“It increases our cost of borrowing, but money is available and there are plenty of ways of getting it,” Chandra said. The Unitech board has passed a resolution to increase its borrowing limit from Rs3,000 crore to Rs10,000 crore. It paid Rs49 crore in interest in the quarter ended December, a six-fold increase over a year ago.
Biyani said he would look at a few options ranging from borrowing from banks to raising money by paring stakes in units such as Future Media.
Even cash- rich government-owned companies are wary. “The increase in rates will have an indirect effect on us as the contractors may hike their costs,’’ as their borrowing rates increase, said R.S.Sharma, chairman and managing director, Oil and Natural Gas Corporation, India’s largest oil and gas exploration company.
Some companies are hoping the regulator will ease norms on raising money from alternative sources.
India Cements, which last year raised $75 million through foreign currency convertible bonds, reckons if the regulator allows companies to raise money from abroad irrespective of the end-use, there would be less pressure on domestic liquidity. Now, companies are allowed to raise overseas funding only to meet their capital expenditure requirements.
“It’s just a signal that the regulator is sending with respect to inflation, ” says V. M. Mohan, vice-president, Corporate Finance at India Cements.
With inputs from Utpal Bhaskar, Prashant Gopal and John Samuel
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First Published: Thu, Feb 01 2007. 04 03 AM IST
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