New Delhi: While 95% corporates admit that high interest rates will adversely impact their balance sheets, 85% anticipate downward revision of interest rates in RBI’s credit policy, to be announced on 31July, 2007.
The ABB Survey (Assocham Business Barometre) covered 300 CFOs of which 150 are corporates, 100 bankers and 50 real estate players, however, adds that interest rates rationalization has become absolutely essential to flow liquidity from the system.
The Survey points out that “Interest rates have to be downward as inflation has been normal and within permissible limits. Also since adequate liquidity is available in the market, majority of respondents said that there was a 17% rise in PLR in June 2007 over June 2006. The call money average turnover has gone down by 1.9% in June 2007 over June 2006. The call money rate (weighted average) has gone down by 56.5% in June 2007 over June 2006 and by 88% in June 2007 over March 2007”.
The dip in call money indicates that there is adequate liquidity in the system. The CRR has gone up by 30% in June 2007 over June 2006. High interest rates will reduce the demand inversely affect on GDP growth, felt the CFOs.
High interest rates to impact economy
95% respondents felt that high interest rates have an effect on the balance sheets of their companies. The high interest rate has been worrisome and will be apparent in their coming quarterly results. Even the equity earnings of the stock markets will be on a downward trend. In this scenario,SMEs and mid sized companies will be affected with higher interest rates as the result of outflows. The PLR has risen by about 17% in June 2007 over June 2006. The increase in interest rates will only dampen domestic supply growth by increasing the cost of borrowing for companies.
Inflation to be under control
Inflation is going to be normal and within permissible limits in 2007-08. The reasons being a normal monsoon as rainfall recorded is 27% higher than previous year increase in agricultural production by 2.6% as compared to 0.9% in the previous year and also since rupee appreciated by around 10%, which makes imports cheaper.
Higher liquidity in markets
On adequate liquidity in the market, 90% felt that there is excessive liquidity in the market and expects it to grow further in the FY 2007-08 as result of massive consistent capital inflows. The excess liquidity in the first quarter of the current FY has gone up by 9%. In the month of June, the excess liquidity in the system stood at Rs.72,343. According to the bankers surveyed, excess liquidity with banks is arising because of strong growth in deposits and low credit off take.
Real estate growth to continue
India’s forecast of real estate growth is from $12 billion 2005 (Rs48,000 crore) to $90 billion (Rs 3,60,000 crore) by 2015. Greater integration with the global economy and increase of domestic and foreign investments will continue to encourage demand for real estate.
The boom in the housing sector led to increase in mortgage lending and now with interest prices rising, the sector had been hit as the key challenge for RBI is reining in inflation and cooling the market through monetary and credit tightening without creating a hard landing that could have significant political and economic consequences. The interest rates for housing loans have risen to around 12% and this resulting squeeze.
Cost of living to rise further
The growth momentum of GDP is at 8.5% in 2007-08. The agriculture production is expected to rise by a higher 2.6% as compared to 0.9% increase in 2006-07. Inflation is at 4.3% in the first three weeks of June 2007. But the cost of living continues to rise because of the rising cost of housing.
Money supply continues to grow at robust pace of over 21% driven largely by accelerated growth in term deposits of banks though small savings, which are excluded from money supply, are experiencing decelerated growth. Public issues have emerged as the major route for Indian companies to mobilize resources from the domestic primary market. Capital inflows have been on a rise and deposits in banks are growing whereas credit growth has stopped. The housing sector has been hit by higher interest rates.