Cut in policy rate to spur investment

Written by Sunny Verma | Updated: Apr 24 2012, 02:24am hrs
The Reserve Bank of Indias latest rate cut would bode well for state-owned companies planning significant capital expenditure in 2012-13. PSUs in sectors like petroleum, steel, power and coal are expected to spend around R 3.5 lakh crore this fiscal for meeting their capex needs.

Since the government will be funding only about 20% of their total financing needs through budgetary resources, PSUs would be meeting the remainder by generating resources on their own. Borrowings in the domestic as well as the overseas market are chief sources of finance for the PSUs.

State-owned firms also raise funds by selling bonds & debentures and by raising deposits from the public. The downward trend in interest rates would surely make it easier for them to raise funds locally, even as international funding in the form of external commercial borrowings remains much cheaper. The PSU Index ended the week up 1.56% at 7402.88 points at the Bombay Stock Exchange (BSE) on Friday.

Following the 50 basis points reduction in repo rate announced by the RBI, banks including Punjab National Bank, IDBI Bank and ICICI Bank, have reduced their base rates. Repo rate is the rate at which RBI lends short-term funds to the commercial banks.

The finance ministry has also permitted power sector companies to replace their rupee debt through ECBs, which are as much as 400 basis points cheaper than the domestic debt. Peak interest rates in India and rock-bottom finance costs in developed nations have increased the interest rate arbitrage between the borrowing costs in India and overseas.

To step up investments in the economy, the government including the Prime Ministers Office, is nudging PSUs to kick-start investments. This is needed to protect economic growth, which fell to 6.9% in the third quarter of the last fiscal. GDP growth in 2011-12 is estimated to stay around 7%.

In this years budget, the government has allowed state-owned infrastructure companies to raise R60,000 crore by issuing tax-free bonds for funding infra projects. Oil and Natural Gas Corporation (ONGC), which will spend the highest capex of R33,065 crore in the current fiscal, will arrange the entire funding itself without any government support.

The National Highways Authority of India (NHAI) will get the highest budgetary support of R11,472 crore from the government, followed by Air India that gets R4,000 crore. The Delhi Metro Rail Corporation (DMRC), which will get budgetary support of R2,117 crore, will be spending another R2,395 crore through its internal resources.

With the RBI having cut its chief lending rate, analysts expect government to follow with policy reforms to push investments in the economy. The lowering of the interest rate is good news in the scenario of fledgling growth but may not be enough to stimulate investment, rating agency Crisil said in its report on the monetary policy. The investment slowdown in the country can largely be attributed to policy bottlenecks, it said.