Firms shrug off rate hikes, cheer likely pause in cycle

Firms shrug off rate hikes, cheer likely pause in cycle

Mumbai: Indian companies shrugged off the fifth rate increase by the Reserve Bank of India (RBI) on Thursday, cheered by hints that the it may be pausing its rate increase cycle.

The RBI lifted its key short-term rates more aggressively than expected by economists, but said monetary situation was nearing normal and that future action would be driven by economic conditions.

Also Read | RBI hikes policy rates to fight inflation

“It’s a better scenario now," Tarun Sisodia, head of research at Anand Rathi Securities, said.

“Now the companies know for certain that the hikes are over you can take funding decisions the way you wanted to," he added.

Corporate executives said the current rate increase may not impact their costs significantly and added that consumer sentiment will not be impacted.

“There will be a slight increase in interest cost, which is not very significant and will be absorbed by the industry," said T. Srinivasa Rao, vice president, finance at Rain Commodities, a cement company.

At its mid-quarter policy review, the RBI hiked its repo rate by 25 basis points (bps) to 6% and reverse repo rate by 50 basis points to 5%, while most economists had expected a 25 basis points raise in both the main policy rates.

Santosh Singhi, finance director at auto parts maker Amtek Auto said the hike in interest rates will not pull demand down.

Demand for passenger cars is likely to leap 12 -13% in 2010-11, according to the Society of Indian Automobile Manufacturers.

The Indian economy, Asia’s third largest, is forecast to grow 8.5% in 2010-11 driven by buoyant demand from autos and the consumer goods sector.

Banks may up rates

Commercial banks are likely to pass on the interest rate rises to customers, officials said.

“The signal is there that rates are going to be hiked, but I don’t think the banking industry will hike it in a hurry, because this is a quarter-end," Albert Tauro, chairman and managing director, at Vijaya Bank said.

“But, there could be definitely some upward revision in lending rate and deposit rates, minimum by 25 basis points," he added.

However, companies from capital intensive sectors such as infrastructure, steel, and oil and gas may see some increase in their projects costs as a result of the hike, officials said.

“It will certainly have an impact on the borrowing cost of GAIL Gas, but it will be a smaller one," Anil Kumar Sahni, chief financial officer at GAIL Gas Ltd, a subsidiary of GAIL India Ltd, said.

But some like Welspun Group’s Akhil Jindal were more concerned.

“Projects will become more expensive, the viability of projects are going to be severely impacted. Our average cost of borrowing is 11% now. How can the industry sustain growth?"

Headline inflation WPI eased to 8.5% on an annual basis in August, still well above the central bank’s perceived comfort level of around 5% and keeping real interest rates stuck in negative territory.

The Bombay Stock Exchange’s real estate index and the auto index and the consumer durables index closed down 0.3%. The broader 30-share BSE index also ended down 0.3%.