Rate hike seen weighing on firms’ borrowing, capex

Overall business sentiment, including production and rural demand, could suffer

Mumbai:The Reserve Bank of India’s (RBI’s) decision to raise its benchmark interest rate for the first time in four years will affect corporate borrowing and may also impact capital investment cycles, experts said.

The six-member monetary policy committee voted unanimously to increase the repurchase rate to 6.25% from 6%.

“The hike in policy rate would affect overall business sentiments including the production possibility frontiers of industry, expansion of trade and services sector activity and rural demand," said Anil Khaitan, president, PHD Chamber of Commerce and Industry.

Companies, especially small and medium enterprises, are facing an acute problem availing of finances from banks, thanks to stringent norms recently adopted by some public sector banks, he said.

“The working capital is already impacted because of buyer-credit limits under the LoUs/LoCs (letter of understanding/letter of credit), which has impacted billions of dollars from the system," Khaitan said.

The move will also impact the automobile sector, which is looking to create fresh capacity after almost a decade.

“Not only will the increase in rates impact the cost of funds for manufacturers, but also the customers who are seeking loans from banks to purchase cars," said Shekar Viswanathan, vice-chairman, Toyota Kirloskar Motor Pvt. Ltd. “This is in addition to the burden of substantial increase in fuel costs due to the rising cost of imported oil. But we believe the government knows the facts on the ground and will take steps as appropriate."

Sales of automobiles in India have started to revive, with the country’s top five carmakers, Maruti Suzuki, Hyundai, Mahindra & Mahindra, Tata Motors and Honda, collectively selling 243,856 units in May, up 20.6% from 202,187 units a year ago.

This has highlighted capacity creation in the sector. Maruti Suzuki vendors need to collectively invest 1.5-2 trillion in the decade starting 2020 to keep pace with investments Suzuki Motor would make in India, Mint reported on 24 May.

To be sure, RBI’s move to increase the repo rate and its impact on corporate borrowing also needs to be seen against the backdrop of the changing credit culture at Indian companies, as the Insolvency and Bankruptcy Code empowers financial and operational creditors to take action against defaulters.

Promoter groups are wary of losing control over their companies, as once a company is admitted by the National Company Law Tribunal, the insolvency professional immediately takes over its operations and the board stands suspended.

“RBI was in a Catch-22 situation in terms of managing a fine balance between emerging inflationary pressures and a nascent economic recovery," said V.S. Parthasarthy, chief financial officer, Mahindra & Mahindra Ltd. “With the higher than expected rise in GDP in Q4 FY2018, RBI has raised interest rates so as to catch inflation before it catches up."

Any impact on lending in the power sector will be offset by high consumption demand.

“Over the short term, we have seen power demand spike because of the summer; consumption demand has grown 6-7% from that of last year," said Sharad Mahendra, executive vice-president, energy business, JSW Energy Ltd. “This will offset, to a certain extent, any immediate increase in costs."