Mumbai: A growing uneasiness is palpable among Indian companies, individual borrowers and even commercial lenders as the central bank may increase its policy rates, the 13th such hike since March 2010, to rein in a persistently high inflation in the world’s second-fastest growing major economy.
Firms are resisting RBI action, arguing that it could further damage the already weak investor sentiment, create a roadblock for ongoing projects and stymie job creation. Bankers, too, are against any further increase because it could hurt their margins and result in more bad loans in the industry, already burdened with multiple loan recasts and slow loan growth.
Tough choice: Reserve Bank of India governor D. Subbarao. Photo: Bloomberg.
There aren’t too many takers for the central bank’s argument that money needs to be made more expensive to tame inflation. While inflation remains high despite rate hikes, economic growth is being affected, they argue.
“Policy rate hikes have already had an impact because the economic growth rate is below the rate of growth of potential output around 8%. Further action will mean that the pendulum will swing downward,” said Rajiv Kumar, secretary general of industry lobby group Federation of Indian Chambers of Commerce and Industry, or FICCI.
“RBI has to understand that a tight monetary policy together with a loose fiscal policy will not solve the problem,” Kumar said, pointing to a record government borrowing programme.
“(Any) more hikes will kill industries,” Vinod Juneja, managing director of Binani Group of Industries said. “Interest rate hikes by RBI are not justified because it has not succeeded in curbing inflation but, in fact, is hurting industry.”
The RBI’s actions to tame inflation has taken its key policy rate to 8.25% but wholesale price inflation continues to remain high, way beyond the central bank’s comfort level. On the other hand, rate actions have had an impact on growth. For instance, industrial production has stayed below 10% in the last 10 months. It recorded a 4.1% growth in August.
But there is no indication that RBI will press the pause button.
“Industry is concerned about tightening of policy and its impact on growth. Inflation has come down from peak but it’s still above RBI’s comfort zone. Growth has decelerated in the last three quarters but we are still seeing evidence of demand side pressures in the economy,” RBI governor D. Subbarao said in Jaipur last week after the central bank’s board meeting.
During the customary meetings with RBI top brass in the run up to the 25 October policy review, bankers, industry patrons and even economists have urged the central bank to hold its guns for the time being.
“A further hike will dampen (the sentiment)…a bit more. It is already done,” S. Raman, chairman and managing director of Canara Bank, said. “If they take a pause that could help in restoring the investor confidence as there is a psychological impact on investors when you up rates,” Raman said.
A steep rise in the lending rates in the last one year has impacted the loan off take of commercial banks. So far this year, the bank credit has grown 7%. RBI has pared its year end projection of loan growth to 18%. Most bankers say there is no new loan proposal for projects while firms are lifting working capital loans to keep the production cycle going.
Bankers attribute the slowing demand to a sharp decline in new projects because of multiple factors such as delay in getting clearances besides a rise in overall lending rates in the system.
“Sentiments are down, the business environment is not very strong but it is not on account of only the interest rates having gone up,” said M.D. Mallya, chairman and managing director of Bank of Baroda and chairman of the national bankers’ lobby, Indian Banks Association (IBA).
“There are hosts of other issues that have contributed to that, mainly from the point of view of reforms that the corporates would like to see going forward,” Mallya said.
For instance, the number of real estate projects have halved in the last one year because of lack of availability of sufficient bank funding, high interest rates being one of the factors. Even sectors such as power have seen the number of projects declining sharply in the past one year.
“Real estate developers were mostly financed by booking amounts from buyers. Now with buying decisions being postponed, it has led to a cycle with even companies delaying construction,” said Rajeev Talwar, group executive director, DLF Ltd, India’s largest property developer.
“More rate hikes will only make the situation worse and common public will be impacted so there should not be more hikes,” Talwar said.
Talwar also referred to a study by credit rating agency Crisil Ltd, which said rising interest rates on home loans because of rate hikes by banks will put an additional annual burden of Rs 6,000 crore through higher equated monthly instalments on home loan borrowers. Analysts warn that commercial banks, which are already facing a squeeze in their margins and sharp rise in non-performing assets (NPAs), are constrained to pass on the central bank’s policy actions to the borrowers.
“There is a limit to how much cost banks can pass on and beyond that if they pass on it will be counter-productive and, no doubt, will lead to bad assets,” said Santosh Singh, an analyst with Espirito Santo Securities.
Singh expects loan rates to go up 25 basis points if RBI chooses to up rates by an identical margin next week. One basis points is one hundredth of a percentage point. Most banks have not passed on the burden of the last 25 bps hike in September yet. The Indian banking system had witnessed its highest rise in NPAs in the April-June quarter, when the gross bad assets rose by 7.64%—from Rs 60,685 crore in the January-March quarter to Rs 65,318 crore.
(Anup Roy in Mumbai contributed to this story).