With manufacturing and infrastructure growth in India sputtering, most of industry expected the RBI to give in to their demands and place cheap money on the table. The country’s industrial output contracted to its lowest levels in 14 years last month, pointing to a deep distress in its core infrastructure sectors.
Yet, the Reserve Bank of India (RBI) decided to hit the pause button on rate action, based on concerns over anchoring of inflationary expectations.
“I’m a little disappointed with the RBI’s decision," Sachit Jain, Vice-Chairman & MD of Ludhiana-based Vardhman Special Steels, told Mint. “For the economy to grow, we need lower costs of capital. Real interest rates in India are too high even now. Today, we need investment in the economy and with the government offering a corporate tax relief, the push needs to come from lower interest rates.
“While well-capitalised companies will continue to be able to borrow funds, we see many of our customers are on a stretched credit cycle and the cost and availability of finance for them is an issue," Jain continued. “They were hoping for a further rate cut, especially at a time when banks haven’t fully transmitted past rate cuts down to borrowers. Banks need to transmit the past rate cuts to borrowers fully now."
“The large entities in infrastructure and metals and manufacturing, they have already massively slashed their capital expenditure plans," a senior industry analyst who did not wish to be named, said. “Large steel companies, for instance, are going to be disappointed with the large interest outgoes they have this quarter. Many of them are turning to forex debt as an alternative. PSUs will begin to rely on commercial papers for additional borrowings. I think the worst affected will be the medium and small-sized players. From an operational cash flow perspective, they face significant challenges and don’t have access to alternative financing. Unless their capital utilization goes up - and the signs seem to suggest they won’t anytime soon – we’re going to see stress deepen in this class of firms within infrastructure and manufacturing."
A senior banker at a public sector bank concurred. "With interest rates not falling despite slow loan growth, the onus of pushing growth falls solely on the government now. It has to increase public spending in infrastructure which can generate employment opportunities and help push demand in the economy."
Economic growth has slowed to 4.5% in the September quarter, its weakest since 2013. This despite a cumulative 135 bps cut in policy rates this year. Despite the monetary stimulus thus far and a slew of government measures to boost the economy, economists do not expect an immediate recovery in growth momentum.
Credit growth continues to be weak with bank non-food credit growing below 8% and loan sanctions by non-banking finance companies falling by 34% in the July-September quarter. RBI’s professional forecasters’ survey has projected bank credit growth at 12% for the fiscal year 2019-20 and 12.9% for the fiscal year 2020-2021. While liquidity remains intact with banks parking as much as Rs3.04 trillion with RBI, lack of availability of funding is a challenge.
"If you see, in the engineering, procurement and construction space orders have gone down. Among key sectors, it is only the road sector which has seen material orders. It is also because there is a lack of trust in the credit system of the country which is restricting its flow," added the senior banking official.
“To change the mood of the consumer, you need lower interest rates," Jain of Vardhman Steels said. “With CPI at 4%, inflation going up a little should not be a problem. Growth and job creation are the imperatives now. While the central government has shown its resolve, the RBI should do its part."